Why Positive Momentum Matters

by | Feb 3, 2007 | Asset Management

In the late 90s, when Internet stocks were starting to run higher
and higher, there was no logical (fundamental) explanation why.
Those stocks were going up because they were going up.  They had
positive momentum.
These very same stocks started to crash a few years later.  Even
though these companies were still growing like weeds, there was no
stopping them from going down further.  They had negative momentum.

Remember, a body in motion tends to stay in motion.  When a stock
or mutual fund begins to show positive (or negative) momentum, it
often moves in that direction for a while.

With the point and figure charts I use, we can measure momentum on
a daily, weekly or a monthly basis.

When we’re examining a new mutual fund or stock to buy, if I see
that the weekly momentum has been positive for 12 weeks, I will
normally suggest that we invest only a small amount — but be
prepared to buy more when it pulls back.

That’s because my experience tells me that we’ll probably see a
pullback coming very soon — since the momentum has been moving
positive for such a long time.

Does that make sense?

So, daily and weekly momentums give us an excellent tool to stop
us from buying too high — or getting out too low.

One more thing about weekly momentum: it usually gets the attention
of the media. You’ll often hear commentators say this sector or
that sector has been really hot.  The sectors they’re talking about
have had positive weekly momentum for several weeks. And often,
that momentum is about to change — in the other direction.

This helps explain why people get sucked in at the top, or throw
in the towel at the bottom.  Know anyone that has done that?
Now, monthly momentum is where we can see some really nice gains
— since it identifies which groups are getting ready to make big
long term moves.

When you can identify areas of the market that are starting to see
positive monthly momentum, you can pick out some real bargains.
The drug sector, non-air transportation sector and the steel sector
are now starting to all generate positive monthly momentum, after
being negative for several months.

Since I chart many of the individual stocks in these sectors each
day by hand, I’m seeing some particular drug stocks and some
transportation stocks start to emerge from consolidation periods
— some of which have been several years in length.

There are some really great opportunities waiting in these sectors.
Remember, these are moves that are longer term in nature.
They are not short-term trades.  Please call the office at
(732) 223-9000, so we can set a time to discuss which names may
be appropriate for you.

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