For many years, traditional mantra of equity investors has been simple: “Buy low, sell high”. The strategy behind this saying is called “value investing” and it relies on buying shares that are fundamentally undervalued and holding them until they appreciate to their underlying value.

Recently we have presented a report on short-term “Dividend Plays” that offers an alternative to long-term buy-and-hold approaches. In this report, we seek to identify other profitable short-term market opportunities, which can be used by savvy traders as an alternative to buy-and-hold investing.

Growing Stronger

UK 100 index of UK blue-chip stocks has been rising steadily over the past quarter and the late May of 2018 has seen the index reach all-time highs.

One example of a stock that has benefited from UK Index ’s positive momentum is NMC Health. This UAE-based healthcare provider has seen its shares grow by leaps and bounds over in the recent years.

• 2015: +82.7% (#1 UK 100 performer)
• 2016: +83.7% (#3 performer)
• 2017: +86.9% (#1 performer by 30%)
• 2018: +30% year-to-date (#4 on UK 100 )

Riding these kinds of market waves lies at the heart of a strategy called “momentum investing”.

Momentum Defined

But what is this momentum? How can it be expressed and quantified, and can investors benefit from studying technical momentum indicators to identify shares to buy or sell?

In the context of the stock market, momentum refers to the speed at which the price of the stock changes. When the share price is quickly going up, the stock is said to have “positive momentum” and, conversely, when the prices are quickly going down, these shares have “negative momentum”.

That seems intuitive enough, but how does that help an investor profit? Can a speed of change in the share price tell investors something about which stocks to invest in and which to avoid?

Momentum Investing

A traditional investor will “buy low and sell high”, but a momentum investor will instead “buy high and sell higher”. Instead of looking at fundamental criteria such as earnings and P/E ratios, momentum investors will look purely at technical indicators, such as trend lines and moving averages.

At its core, momentum investing is about understanding the psychology of the market and how traders tend to “rush” into certain stocks and drive them up or down not just based on fundamental value, but also because of emotion and market inertia. The goal of momentum investing is to identify and profit from such bull rushes.

Here at Accendo Markets, we are looking to empower our clients with expert knowledge and understanding of the markets that goes beyond inflexible, dyed in the wool investment techniques.

This report will demonstrate ways to identify profitable market momentum opportunities and evaluate stocks that have recently been experiencing positive momentum.

Read on to find out more about momentum investing and sign up to have our research sent directly to your inbox.

Full Speed Ahead

 A powerful trend can feel intimidating to both inexperienced investors and seasoned market professionals. Many traders are often hesitant to take advantage of strong directional movements of share prices because they might feel that they have already missed their chance.

They reason that by the time they have spotted a developed trend and entered a position, it will already be too late to secure any meaningful gains, that the trend will hit some support or resistance line and reverse, leaving them with losses.

However, this logic runs contrary to the basic principle of technical analysis. When a trend is established, up or down, technical analysts assume that it is more likely to continue in that direction than reverse. Unless there are more compelling reasons for the share price to stop moving upwards or downwards, that trend will continue moving from one high or low to another.

Even if the share price has already risen by a significant amount or the uptrend has been happening for a long period of time, it is likely to continue going up as long as the trend is still valid.

Market Subconscious

Buy what makes a trend valid? What market forces sustain uptrends and downtrends? Ironically, one of the strongest factors that drive trends are emotions and psychological reactions of investors.

Investors are subjected to powerful emotional stimuli that encourage them to trade certain stocks and drive their share prices up or down. Some companies can become “story stocks”, with investors feeling a sense of pride, accomplishment and belonging just from owning certain company shares (Apple and Alphabet are good example of such “story stocks”).

Market traders are also not immune to being subjected to “herd mentality” by investing in certain shares because their peers and competitors do so as well. Instead of buying and selling shares because of their underlying value or because technical indicators support these trades, such investors buy shares because they feel an emotional attachment to the brand name.

Running with the Bulls

Emotional investment is especially powerful during bullish markets, when many investors are feeling optimistic and become more eager to buy. In bearish markets, investors are naturally more cautious and there are less opportunities to take advantage of this herd mentality.

One of the key aspects of momentum investing is to be able to tap into this bullish emotion that can become visible on technical charts. Large number of traders that act on their emotions (e.g. fear, exuberance, hope, etc.) can put enough pressure on the stock price to propel it in a certain direction.

The goal of a momentum investor is to monitor the “pulse” of the market, follow the news that can create such emotional reactions, identify a trend produced by other investors, piggyback existing momentum and profit from bullish sentiment.

Successful momentum investing requires strict adherence to a set of rules to limit risk exposure and maximise profits. These rules do not prescribe which stocks to buy or sell, or which levels are most advantageous for trading momentum. Instead, their purpose is to instil a mindset of discipline that is critical to shorter-term momentum traders compared to longer-term buy-and-hold investors.

Risk Management

Before entering any trend-following trade, investors need to be certain that the opportunity actually exists. They wait for evidence of momentum to show itself as an already developed trend instead of anticipating it. They watch candlestick patterns and their movement closely. If the share price keeps testing a resistance level, but always pulls back, it could mean imminent trend reversal.

As momentum grows and a position becomes profitable, it is necessary to adjust stop-loss levels to protect profits (not too close, but not too far either). If the trend suddenly turns, tighter stop-loss will help retain gains.

The rule of thumb is to always allow the profits to run, but investors shouldn’t let momentum completely exhaust itself. If momentum starts weakening, it is safer to exit the trade ahead of the general crowd instead of waiting to gain an extra decimal point of profits.

Timing

Special attention needs to be given to proper timing of trade entry and exit. When trading momentum stocks, the most advantageous entry timing would be when sudden news story touches off share price movement and dislodges the stock from one support or resistance level to another.

This means that momentum traders need to closely follow corporate and global events to anticipate potential impact stories. The goal of this monitoring is not to better understand the company’s fundamentals, but rather to predict which stories can create the most intense emotional reaction from the market which in turn would drive share price momentum. The same is partially true for timing the exit from the stock. A sudden news story can stop and reverse a trend, but trends can also exhaust themselves when hitting a major resistance or support level.

Target Selection 

When looking for momentum opportunities, it is preferable to invest in securities with plenty of liquidity. These include either popular stocks with large traded volumes, or “hot” stocks that have attracted intense public interest due to being in the news or offering a unique product.

Investors need to be aware that seasonal patterns can affect traded volumes, with summer months and holiday periods typically having higher volatility and price uncertainty. Since momentum investing concerns itself with price movements and direction rather than underlying company worth, it is better to avoid periods when prices can move erratically due to low volumes.

Instead of trying to “pick” stocks based on their fundamental value, momentum investors seek to “piggyback” an already existing trend. Thus, the art of momentum investing lies in spotting developed trends early to get the greatest rewards with the least risk.

NMC Health

NMC Health, which has already been mentioned earlier, is a good example of a company that has experienced positive momentum. Since the start of 2018, it has been in a steady uptrend, with strong upwards momentum.

To identify individual instances of positive momentum, an investor can use the Momentum Technical Indicator (illustrated in the bottom half of the chart below). Every time momentum is positive, indicator moves north, creating an area shaded in blue. When momentum starts to slow down, the indicator starts dipping, which is a strong signal for investors to either re-evaluate their positions, or to exit the trade entirely.

On the chart below, three individual instances of positive momentum are identified by correlating momentum indicator with share price movement.

Source: CMC Markets, Date: 31.05.2018

• Between January 2 and January 29, NMC Health share price rose 14.5%, which can be correlated with the rise and fall of the momentum indicator.
• Momentum Indicator rising or falling can be a compelling buy or sell signal for short-term investors.
• There are additional periods of positive momentum in late April and late May, also correlated to the Momentum Indicator moving from neutral position into positive.
• Overall, the share price maintained an upward trend, meaning that investors could either buy-and-hold the security (estimated +30% YTD), or trade the security multiple times using individual “momentum windows” for potentially higher overall return.

Continue reading to find out more about our 5 top stocks that have been experiencing positive momentum in 2018.

To understand practical aspects of momentum investing better, let us examine a few select companies in detail to determine which stocks can potentially present momentum investment opportunities and identify periods of positive or negative momentum from charts.

Diageo

Alcoholic beverages producer Diageo is a traditional defensive UK Index stock, a type of company that provides stable earnings when markets are turbulent and other shares become riskier investments.

Diageo shares have risen 15% since April and maintain a strong uptrend, with multiple examples of individual positive momentum identifiable on the chart below using the momentum indicator.

Broker consensus is Bullish, with 45% of analysts recommending “buy” and only 3.2% advocating “sell”. (Source: Bloomberg, Date: 31.05.2018)

Brokers’ average 12-month target price is 2697p. The latest recommendation from Credit Suisse is suggesting the stock will “Outperform” the market, with a target price of 2950p. (Source: Bloomberg, Date: 31.05.2018)

Source: CMC Markets, Date: 31.05.2018

BP

BP is one of the energy market’s so-called “supermajors” and a UK 100 heavyweight, with its share price tightly tied to the oil market. This connection would, logically, make BP shares closely follow fundamental economic trends, but it is possible to trade BP shares using technical analysis by piggybacking individual instances of positive or negative momentum.

BP shares have been in a sustained recent uptrend on the back of stronger oil prices. They have risen 16.4% in April-May 2018, but there are individual periods of positive momentum where short-term trades can bring a potentially larger cumulative return.

Broker consensus is Bullish, with 46% of analysts recommending “buy” and only 10.7% advocating “sell”. (Source: Bloomberg, Date: 31.05.2018)

Brokers’ average 12-month target price is 589.32p. The latest recommendation from Société Générale classifying the stock as a “Buy”, with a target price of 615p. (Source: Bloomberg, Date: 31.05.2018)

Source: CMC Markets, Date: 31.05.2018

Experian

Source: CMC Markets, Date: 31.05.2018

Experian a consumer credit reporting agency, responsible for collecting and analysing information from hundreds of millions of individuals.

After a period of negative momentum in the beginning of the year, Experian shares have been trending strongly upwards since April. Shares have risen 17.4% in April-May 2018 overall and there are individual instances where periods of both positive and negative momentum could have been used as potential investment opportunities, by entering either a long or short position in the market.

Broker consensus is strongly Bullish, with 73% of analysts recommending “buy” and only 6.7% advocating “sell”. (Source: Bloomberg, Date: 31.05.2018)

Brokers’ average 12-month target price is 1857.3p. The latest recommendation from Jefferies is classifying the stock as a “Hold”, with a target price of 1720p. (Source: Bloomberg, Date: 31.05.2018)

InterContinental Hotels Group

InterContinental Hotels Group is a hospitality company operating in nearly 100 countries. Company shares have been trending upwards since April (+12.45%), getting closer to the resistance level of January 2018 highs.

Despite the overall uptrend, there are several instances of negative momentum, allowing investors to combine a longer-term buy-and-hold strategy with shorter-term negative momentum short plays.

Broker consensus is Neutral, with 12.5% of analysts recommending “buy”, 29.2% of analysts suggesting “sell”, while the remaining 58.3% are taking a Neutral stance. (Source: Bloomberg, Date: 31.05.2018)

Brokers’ average 12-month target price is 4746.15p. Broker AlphaValue is recommending “Reduce” and a target price of 4996p. (Source: Bloomberg, Date: 31.05.2018)

Source: CMC Markets, Date: 31.05.2018

Hargreaves Lansdown

Hargreaves Lansdown is a major UK investment management and financial services company. Broker consensus on Hargreaves Lansdown is Neutral (52.9% of brokers), with 41.2% of analysts advocating “sell” and only 5.9% in favour of “buy”. (Source: Bloomberg, Date: 31.05.2018)

Brokers’ average 12-month target price is 1673p. Latest broker recommendation from Exane BNP Paribas is rating Hargreaves Lansdown as an “Underperform”, with a target price of 1445p. (Source: Bloomberg, Date: 31.05.2018)

Source: CMC Markets, Date: 31.05.2018

Hargreaves Lansdown shares have been experiencing periods of both positive and negative momentum in 2018, with shares trending upwards during the April-May period. Because the trend line has shifted multiple times since the beginning of the year, a traditional buy-and-hold strategy would net investors a 4.91% return year-to-date (31.05.2018).

At the same time, investors who use a shorter-term momentum strategy would have been able to seize multiple buy and sell opportunities, with cumulative return in excess of longer-term buy-and-hold approach. Compared to traditional investment approaches, a momentum play is a more proactive strategy that gives informed investors multiple entrance and exit points into the market.

With discipline, foresight and thorough research, momentum investing can become a profitable alternative to traditional market strategies. The two approaches are complementary, with investors able to both follow a long-term trend and take advantage of short-term momentum plays when they spot an opportunity to profit from an emotional market reaction.

Want to take advantage of the above opportunities right now?

Whether you see UK Stocks going up or down for the remainder of the year, tradable opportunities will present themselves regularly. We’re here to help you weed them out and capitalise on them. Accendo Markets can help you increase your profit potential with the use of leveraged instruments such as CFDs, a flexible alternative to traditional shares that is currently exempt from UK stamp duty.

CFDs: Like shares, but more flexible

While buying 15,649 shares in Lloyds Banking @ 63.90p requires an outlay of around £10,000 plus commission, the same exposure via a CFD requires about £500 plus commission (see right-hand box; margin + costs). If a trader invests in Lloyds Banking, one would assume they believe the share price is likely to move in their favour. After considering the ‘worst case scenario’ and assigning funds to cover it, the trader may conclude there’s little point in exposing the full £10,000 to Lloyds Banking shares - some of that capital could be put to good use elsewhere in the markets. (Source: CMC, Prices indicative)

CFDs are leveraged instruments, but you don’t have to use leverage

If you had, say, £10,000 to invest in the stock market, you could deposit that amount into a share dealing account and purchase shares in a company. You would pay commission to open the position, 0.5% in stamp duty and the full £10,000 will be tied up in your chosen shares with any profit or loss based on that exposure. The same £10,000 worth of exposure can be secured with a CFD for a fraction of the initial outlay thanks to leverage, with the risk and reward the same as if £10,000 worth of traditional shares were held. But should you not be interested in leverage, you can always treat CFDs like shares. Simply deposit £10,000 into a CFD trading account and take the equivalent CFD position which will tie up as little as 3%/£300 (note that overnight financing costs will still apply). The remaining £9,700 is not tied up, so you can use some of that to take advantage of another short-term opportunity elsewhere, or simply leave it on the account to support any losses. Best of all, using a CFD means you pay no stamp duty!

What’s your view?

Think shares will rise? Take a long position by buying CFDs (buy low, aiming to sell high). Think they’ll fall? Take a short position by selling CFDs (sell high, aiming to buy low). For a more detailed rundown of CFDs, their mechanics, associated costs and some trading scenarios download our ‘Comprehensive Guide to CFDs’ here.

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If a company has reported earnings before the market opens, we’ll tell you why the shares are called to open up or down in relation to that announcement.

As well as the Morning Report, signing-up to Accendo Markets Research & Trade Ideas offers you the chance to receive the following publications:

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The journalists don’t pay for it and neither do you, so why not give it a go? You’ve nothing to lose and perhaps a little more to gain…

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