5 Momentum Investing Strategies to Consider
Momentum investing can be an exciting and profitable way to trade the stock market. Analyzing the market for stocks that have high velocity and price momentum can be more effective than simply holding a long position. Momentum strategies differ from most trading strategies by focusing on riding already successful assets to the top, to generally outperform average stock returns.
Momentum investing can be a game changer for those who are used to classic ways of investing in stock exchanges. Using advanced technical analysis, you can find predictors that can indicate short-term price movements and directions. By understanding these momentum effects, investors can use advanced software to make much more than incremental gains.
First outlined by Jegadeesh and Titman in their 1993 paper in the Journal of Finance, the momentum factor is a great way of using past performance to inform decisions about portfolio management.
Why invest in momentum?
Momentum trading is a strategy that is proven to work, taking advantage of classic investor behaviors exhibited by market participants. Because so many people attempt to “buy low, sell high,” these behaviors turn into patterns. These patterns can be mapped and can generate different types of momentum. If you are interested in digging into how momentum can generate positive annual returns, check out our guide on Reasons Why Momentum Trading Works.
Momentum can be applied to different asset classes and incorporated into existing portfolios. Here are a few of our favorite momentum trading strategies to help you get the best out of your portfolio. As always, remember that past returns are no guarantee of future success.
The stock market is made up of 11 primary sectors, all of which have their own unique strengths and weaknesses. Some perform better than others at different times. Different parts of the financial market have varying volatility depending on prevailing economic variables.
One strategy for taking advantage of each sector's unique characteristics is our Sector Momentum strategy. Once a month, this innovative strategy invests in the three sectors with the best performance over the past 200 days. Using Sector Momentum, investors can keep up-to-date with the performance of the heavy hitters in the stock market, helping to rebalance their portfolios accordingly. This methodology is a big-picture momentum strategy with a set holding period.
Tech is one of the fastest-growing sectors on the market, with high average price-to-earnings ratios. Our Big Tech Momentum strategy looks at the stock prices for the largest companies in the Nasdaq 100 index. The strategy attempts to generate excess returns by using price action as a momentum indicator to see which big tech companies are doing the best.
Big Tech Momentum Stocks:
It’s simple: every month, this strategy invests in the two big tech stocks with the best performance over the past month. Looking at the past performance of heavy hitters like Amazon, Meta, Apple, and Microsoft allows us to identify trends that can be captured during the monthly rebalance each month.
While this strategy focuses on the largest and most liquid stocks in the Nasdaq 100, it may still generate short-term transaction costs that will drag on performance. Be sure to backtest this strategy with fee estimates using Composer’s backtesting software to determine whether it deserves an allocation in your portfolio.
Our commodity momentum strategy is all about which commodities are performing and which are not. Each month, we consider the performance of each commodity over the most recent time series and evaluate it relative to the portfolio’s set rules. These rules are meant to capture risk factors and market dynamics reflected in commodity prices. Further, only commodity ETFs with sufficient trading volume are included in the strategy. Commodity Momentum can be backtested with benchmarks to help investors understand what momentum returns are possible.
While investors can invest in commodities through mutual funds, futures contracts, and physical holdings, we prefer the ease of ETFs. Commodity Momentum may be a solution for investors looking to combat inflation. You can read more about commodities and inflation in Notes on Inflation.
Just as with other momentum-based strategies, our global momentum symphony attempts to increase future returns by looking at asset prices and past performance. Looking for price trends that endure because of underreactions to new information in the global market can help make investment decisions. World markets, such as the US, Europe, Australasia, the Far East, and Emerging Markets are all evaluated alongside bonds and commodities. Once a month, this strategy invests in the best-performing asset within each category.
Taking advantage of domestic equities, international equities, bonds, commodities, and alternative investments, this momentum portfolio has it all.
Composer’s New 60/40 Portfolio option is an interesting new way of planning your investments. You may have heard about the old-school 60% stocks and 40% bonds portfolio model, popular throughout the last few decades. We took this idea and modernized it, updating the strategy to include an efficient core and commodities for diversification.
Our New 60/40 Portfolio believes in diversification through leverage. This plan allocates two-thirds of the portfolio to a modestly leveraged ETF that should deliver returns similar to a traditional 60/40 strategy. This frees up one-third of the portfolio for diversifying assets, in this case, commodities. It’s a multi-strategy portfolio that combines 60/40 and commodity momentum. Check it out or build your own multi-strategy creation.
Build your own momentum strategy
Don't see the momentum strategy for you? Build your own on Composer today. Choose from different types of indicators, including Relative Strength Index, standard deviation, and exponential moving average. Read more in 5 Best Momentum Indicators for Retail Investors.
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