Axis Money IQ Knowledge Nugget - 210
Axis Mutual Fund
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Understand How Momentum Strategy Captures the Trend in Volatile Markets
In the world of investing, momentum is a powerful force. Momentum investing is all about spotting winners and riding their waves of success. The concept revolves around the momentum factor, which captures the idea that stocks which have done well recently will tend to keep outperforming, at least for a while.
Think of it like this: You’re more likely to watch a movie by a director who’s delivered consecutive hits than someone whose recent films have flopped. Similarly, even the momentum strategies focus on identifying top-performing stocks and then leveraging their continued upward trend.
The Philosophy of Momentum: Persistence Pays
Momentum falls under the category of “persistence factors”. It thrives on the idea that trends in the market often persist for a period before reversing. Simply said it doesn’t ask “why” a stock is climbing; it simply bets that the climb will continue.
Unlike the traditional investing approaches, momentum investing does not get into a company’s fundamentals. It won’t analyse earnings, revenue growth, or balance sheets. Instead, it zeroes in on the stock prices, adhering to its principle of "buy high and sell higher." It may be influenced by investor sentiments, some macroeconomic factors, or even sectoral shifts. And this is what makes momentum investing particularly powerful in volatile markets. As trends may emerge more clearly during times of uncertainty, this offers opportunities for momentum investors to act quickly on.
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