How To Find Best Momentum Stocks For Trading?

Momentum refers to the pace or speed at which the prices of stocks, securities, or other marketable instruments change. This concept is crucial in illustrating the rate at which price movements occur over a set period, thus aiding investors in evaluating the robustness of a market trend. Stocks that consistently move in alignment with momentum trends are known as momentum stocks.

Investors leverage momentum by adopting a strategy of purchasing stocks in an upward trend (going long) and selling them in a downward trend (going short). This approach implies that a stock can either show bullish momentum, where the price is on an upward trajectory, or bearish momentum, characterized by a continuous decline in price.

Recognizing momentum's potential to robustly signify the direction of a trend is vital for investors. This knowledge is essential for making informed decisions about aligning with or opposing the momentum of a specific stock or the broader market.

While it is generally acknowledged that long-term investment in the stock market is necessary for notable returns, an alternate strategy exists. This strategy, known as momentum investing, revolves around the frequent buying and selling of shares based on certain market indicators. In this context, this article will explain what are some high momentum stocks and provide insights on how investors can effectively identify and capitalize on current momentum stocks.

If you want find momentum stocks early use research tools like Momentum Radar that analyze and find what's trending on the market today, and see for yourselves where the attention is going!

What is the Momentum Stock Trading Indicator?

Momentum is an indicator that tracks the speed at which stock prices increase or decrease. It serves as a key tool in analyzing trends, helping to identify whether a stock's price is showing strength or weakness. Historically, momentum has proven to be more effective in rising markets than in falling ones. This is because markets generally have a tendency to rise more frequently than they fall, with bull markets typically outlasting bear markets.

The concept of momentum can be likened to the behavior of a train. Initially, the train starts off slowly, gradually picking up speed. As it continues on its journey, the train ceases to accelerate but maintains a high speed due to the momentum gathered from its initial acceleration. When the journey nears its end, the train begins to slow down, losing its momentum.

In financial markets, this analogy is reflected when investors enter early, buying stocks as their prices start to rise rapidly. Once the underlying fundamentals become apparent and the market collectively recognizes the stock's potential for growth, the stock price surges. For those practicing momentum investing, the most lucrative phase is when the stock prices are at their peak velocity.

What You Should Keep in Mind Trading Momentum Stocks?

When the momentum indicator falls beneath the zero line and then begins to climb, it doesn't automatically signal the end of a downtrend. It simply suggests that the rate of decline is decreasing. Similarly, when momentum is plotted above the zero line, it doesn't immediately confirm a trend; there may need to be several shifts above or below this line before a clear trend emerges.

It is crucial to recognize that momentum is influenced by a variety of factors. Elements such as economic expansion in the economy, company earnings reports, and the Federal Reserve's policies on money supply significantly affect corporate performance and the corresponding movements in their stock prices.

In essence, momentum should not be seen as a forecaster of price direction, but rather as an indicator that mirrors the general sentiment and underlying fundamentals of the market. Additionally, geopolitical events and global financial risks also play a role in steering momentum, causing investment flows into or out of stocks. While understanding market momentum is beneficial for investors, it is equally important to be aware of the factors that drive this momentum and, in turn, affect price trajectories.

What is Momentum Trading?

Momentum trading is an investment strategy focused on capitalizing on significant directional shifts in stock prices. When stocks exhibit a strong upward or downward trajectory, accompanied by high trading volumes, they are considered to have momentum.

The principle underlying momentum trading is that while directional trends may take time to initiate, they can sustain a rapid pace once established. During this phase of rapid movement, traders aim to join the trend, leveraging it for gains. However, when the momentum ceases, the directional trend often loses steam, leading the stock to either move sideways or reverse its course.

A critical aspect of momentum trading is timing—entering and exiting trades before the momentum diminishes and the possibility of a trend reversal increases. Essentially, the objective is to harness profits from the ongoing price movement without attempting to predict the peak or trough of the trend.

What Is Momentum Trading Investing?

Momentum investing revolves around the strategy of buying and selling stocks poised for significant price increases in a relatively short timeframe. The core concept is to take advantage of ongoing market trends.

This approach can be likened to surfing a wave. The goal is to pinpoint a stock poised for a price surge, propelled by factors such as investor trading activities and market sentiment, creating momentum. Investors aim to ride this momentum wave, selling off the stock at its peak before the momentum wanes, thereby securing a profit. These transactions typically occur over a brief period, often spanning a few months or weeks.

The strategy essentially capitalizes on the herd behavior of traders, who often collectively back stocks showing bullish potential, with the hope of exiting the investment at an opportune moment for optimal returns.

Engaging in momentum investing involves navigating higher volatility, which can offer the chance for substantial returns if the entry and exit points are timed accurately. However, the risk is equally high, as poor timing or misjudgment can lead to losses. It's a high-stakes environment.

What Are Some Trading Factors While Choosing Momentum Stocks Screener?

Diverse Trading Strategies

Momentum can manifest in both upward and downward directions. This allows traders to implement long strategies on stocks showing bullish momentum or engage in short selling when stocks exhibit bearish trends. Traders might also combine these strategies, especially near the conclusion of a momentum phase. For instance, a trader might initially invest in a stock showing rising momentum. As this momentum starts to decline, they could close their long position and open a short position in anticipation of a trend reversal.

Importance of Technical Analysis

Unlike fundamental analysis, momentum trading heavily relies on technical analysis. This is because momentum is often short-lived and abrupt, frequently driven more by trading activities than by sudden shifts in a company's fundamental value. Even when a company's positive earnings report or significant news act as a catalyst, the ongoing strength of the price movement is best tracked using technical tools. Technical indicators such as the Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), and stochastic oscillators are commonly used to monitor stock momentum.

Role of Catalysts

Momentum in stocks is usually initiated by a catalyst, like significant news or earnings reports. However, external factors are not always necessary to start momentum. Sometimes, momentum can begin with a technical breakout above a resistance level or a rebound from a crucial support level. It may also be influenced by movements in other stocks within the same sector.

Variability in Momentum

Timeframes Momentum in stocks can span from a few hours to several months. Active momentum traders often focus on short-term momentum, unfolding over hours or days. Conversely, swing traders and longer-term momentum investors might concentrate on price movements that develop over weeks or months.

Objectives of Momentum Trading

The primary aim of momentum trading is to capitalize on directional price movements. Success in this strategy requires traders to enter the market while the stock's momentum is on the rise and exit before it starts to diminish. Identifying high-probability setups is crucial. The more robust and linear the momentum of a stock, the more favorable the setup. Traders utilize technical indicators and volume analysis to assess the strength of a setup and keep an eye on support and resistance levels.

Balancing Risk and Reward

Risk management is a critical component of momentum trading. Traders should always consider the potential risk and reward of each trade. For instance, it might be reasonable to risk a 1% loss for a potential 4% gain if the stock is moving towards a higher resistance level. Conversely, a trade where the potential loss is 4% with only a 1-2% gain might not be as attractive. Setting explicit stop-loss and profit targets before entering a trade and strictly adhering to them is crucial in momentum trading.

How To Find The Best Momentum Stocks Today?

Identifying top momentum stocks doesn't solely rely on fundamental analysis. Many high-performing stocks may not currently exhibit impressive financial metrics. Instead, they represent speculative investments based on their potential future growth. To effectively identify these stocks, several factors should be prioritized:

Investor Sentiment

The rise of momentum stocks is often driven by investor enthusiasm. The general sentiment surrounding a stock plays a crucial role, although it can be challenging to measure. One way to gauge sentiment is through Wall Street analysts' consensus. If a majority of analysts rate a stock as a Buy or have upgraded their recommendations from neutral to positive, this is a positive indicator.

Long-Term Technical Analysis

Analyzing long-term trends in stock prices through technical analysis is essential, although it can be complex. Even without in-depth charting knowledge, understanding basic concepts like a stock's moving average, which reflects more extended changes rather than daily fluctuations, is valuable. Momentum inherently involves a time component, so considering more than just the current closing price is important. Investigating long-term price and volume patterns in charts helps identify lasting momentum trends.

Comparative Performance Analysis

Spotting a stock that has quickly tripled in value is straightforward, but identifying less obvious momentum opportunities requires a more nuanced approach. Comparing returns over both short and long-term periods, as well as against peer companies and the broader market, is critical. Sometimes, what appears to be a standout performer may simply be part of a general market uptrend and not particularly exceptional. Conversely, a stock may seem to be performing well but could be underperforming compared to its competitors, indicating potential future drawbacks even if its shares are currently trending upwards.

Risks And Rewards of Momentum Stocks

A key element in these investments is the somewhat intangible sentiment surrounding them, which is both difficult to measure and to predict. This aspect makes investing in momentum stocks particularly risky, akin to a leap of faith.

Another crucial point to consider is that momentum works in both directions. Just as some stocks experience irrational gains simply because they are favored by investors, others can plummet dramatically when the market sentiment shifts against them. This volatility is often independent of concrete financial data like earnings or sales figures.

Stocks subject to upward momentum can also be equally vulnerable to sharp declines if investor sentiment turns negative. This implies that if an investment is made at an inopportune moment or in a less favorable stock, the investor could face substantial losses instead of the anticipated significant gains. Therefore, navigating the world of momentum stocks requires not just an understanding of market sentiment but also a readiness to face high volatility and potential downside risks.

Myths About Momentum Trading and Investing?

Myth 1: Tax Inefficiency

Contrary to popular belief, a momentum strategy, which involves shifting a portfolio towards top recent performers and away from the least successful ones, doesn't necessarily result in tax inefficiency. While it's true that momentum strategies typically involve higher turnover than buy-and-hold approaches, turnover alone is not an accurate indicator of tax efficiency. The real determinant of effective tax rates is the combination of turnover and the manner in which gains are realized. For tax-saving purposes, it’s crucial for investors to prioritize realizing short-term losses before long-term ones (offsetting gains taxed at a higher rate), and long-term gains before short-term gains (to benefit from lower tax rates). Therefore, a high turnover in a strategy that follows this tax-realization order can be less problematic compared to other possible combinations.

Myth 2: Momentum Equals Growth

It's a common misconception that momentum and growth strategies are similar, mainly because both seem to align with market consensus, unlike contrarian approaches like value investing. However, a closer examination of these strategies reveals significant differences in their methodologies and investment characteristics. Starting with their definitions: growth is often determined by averaging various metrics related to balance sheet growth over a five-year period. In contrast, momentum has a shorter, typically 12-month, lookback window. The differing lookback windows alone suggest distinct outcomes for each strategy. Moreover, while growth relies on fundamental measures, momentum is purely based on price movements. This distinction further emphasizes the differing nature of these strategies and their resultant holdings and sector exposures.

Myth 3: High Risk in Momentum Strategies

The perception of momentum strategies as exceptionally risky stems from the assumption that they involve investing in highly successful stocks with steep gains and potential for significant losses. While this may hold some truth, especially when comparing momentum to growth strategies, it’s important to differentiate between relative and absolute momentum. Relative momentum involves investing in the best performers of a given set, regardless of their absolute momentum levels. This means that in a market where all stocks are down, a relative momentum strategy would still invest in the best-performing stocks of the group, even if their 12-month momentum is negative. Absolute momentum, on the other hand, shifts away from these top-performing stocks in favor of cash or other assets when facing the prospect of negative returns. This distinction is crucial in understanding the risk dynamics of momentum strategies and dispels the myth that they are universally high-risk.

Top Momentum Stocks in 2024

Peabody Energy

Investing in Peabody Energy, the largest coal producer in the U.S., might initially seem counterintuitive in the current environmental context. However, coal has seen a significant resurgence recently, driven by spiking oil prices and Europe's efforts to reduce reliance on Russian oil due to the Ukraine conflict. Coal prices have been breaking records, particularly in Asia, where fuel supplies are tight. In Europe, previously closed coal plants are reopening as alternative energy sources are sought. This trend has positively impacted Peabody Energy (BTU 1.42%), reflected in a remarkable 136% increase in its stock value through June 28, 2022, and a more than 400% rise in adjusted EBITDA to $327.5 million in the first quarter.

Grocery Outlet

While most retailers have struggled lately due to a shift in consumer spending from goods to services, Grocery Outlet (NYSE:GO) has found a silver lining. Specializing in closeouts, it acquires merchandise at lower costs from retailers and wholesalers eager to offload inventory. This allows Grocery Outlet to offer products at exceptionally low prices, an attractive proposition in inflationary times. The company’s stock has risen by 50% year to date, benefiting from the surplus inventory levels of its competitors.

Cal-Maine Foods

Cal-Maine Foods (CALM -1.8%), the largest egg producer in the U.S., epitomizes a true momentum stock. The company's performance closely aligns with egg prices, with profits typically surging when prices rise. Cal-Maine is distinctive in that it pays out a third of its profits as dividends each quarter. With egg prices increasing due to avian flu and general food price inflation, the company saw a 29% rise in average selling prices in the quarter ending February. Its shares have climbed 33% since the beginning of the year and are poised for further growth if egg prices remain high.

Funko

Funko (FNKO -2.72%), known for its P.O.P. collectible figurines, has been experiencing notable growth. The stock increased by 35% over three months in mid-2022, buoyed by a strong earnings report, its acquisition of Mondo, and an endorsement from JPMorgan Chase (JPM -0.33%). With a 63% surge in sales in the first quarter, Funko is defying broader retail trends and has raised its future guidance. Continued strong performance could further fuel the stock’s momentum.

Marathon Oil

The past year has seen Marathon Oil (MRO 1.19%) gain over 70% in stock value. This surge is attributable to the rebound in energy demand and rising crude oil prices, particularly in the context of the ongoing Russia-Ukraine conflict. Marathon Oil, boasting one of the most efficient cost structures in the oil industry, is well-positioned to benefit from sustained high oil prices. Following a challenging 2020 marked by low demand and uncertainty, the company’s prospects look increasingly promising as it capitalizes on the current market conditions.

Momentum Stocks - FAQ

What are momentum stocks?

Momentum stocks are shares of companies that have shown a strong and consistent performance in terms of their stock price, often outperforming the market over a certain period.

How is momentum in stocks measured?

Momentum is typically measured by looking at the rate of change in a stock's price, usually over the past 3 to 12 months, to identify how fast the price is moving in a particular direction.

What is momentum trading?

Momentum trading is an investment strategy that involves buying stocks that are trending upwards and selling them when they appear to lose momentum, aiming to capitalize on the continuation of existing market trends.

Is momentum trading suitable for beginners?

Momentum trading can be challenging for beginners due to its reliance on timing and market analysis. It's recommended for those who have a good understanding of market trends and risk management.

What are the risks of momentum trading?

The main risks include sudden market reversals, overvaluation of stocks, and potential losses if the momentum does not continue as expected.

How do I find momentum stocks?

You can find momentum stocks by looking at stock performance charts, using financial news, and employing technical analysis tools that highlight stocks with strong upward trends.

Do momentum stocks always keep going up?

No, momentum stocks do not always keep going up. They can reverse direction due to various factors like market conditions, company performance, or broader economic changes.

What tools do traders use for momentum trading?

Traders often use technical analysis tools like moving averages, relative strength index (RSI), and trendlines to identify momentum stocks and make trading decisions.

How long do momentum traders hold a stock?

The holding period can vary from a few days to several months, depending on the strategy and how long the stock maintains its momentum.

Can momentum trading be automated?

Yes, momentum trading can be automated using algorithms that identify and trade based on specific momentum criteria.

What is the difference between momentum and growth stocks?

Momentum stocks are chosen based on their recent price performance, while growth stocks are selected for their potential to grow earnings at an above-average rate over time.

Is momentum trading more suited to a bull or bear market?

Momentum trading can be effective in both bull and bear markets, but the strategies might differ depending on the market conditions.

How does news impact momentum stocks?

News can have a significant impact on momentum stocks, either accelerating their momentum with positive news or reversing it with negative news.

What is a momentum crash?

A momentum crash refers to a sudden and sharp decline in the prices of momentum stocks, often occurring when market sentiment changes rapidly.

Can I use fundamental analysis with momentum trading?

Yes, combining fundamental analysis with momentum trading can provide a more comprehensive view of a stock's potential.

Are there ETFs that focus on momentum stocks?

Yes, there are Exchange-Traded Funds (ETFs) that specifically focus on momentum stocks, allowing investors to invest in a basket of such stocks.

How do interest rates affect momentum stocks?

Interest rate changes can affect momentum stocks, as they influence overall market sentiment and the cost of capital for companies.

What role does market volatility play in momentum trading?

Market volatility can both create opportunities and increase risks in momentum trading, as it can lead to rapid price changes.

Can momentum trading be part of a diversified portfolio?

Yes, momentum trading can be part of a diversified portfolio, but it should be balanced with other investment strategies to manage risk.

How do I start with momentum trading?

To start with momentum trading, educate yourself on market trends and technical analysis, practice with a demo account, and consider starting small to manage risk.

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