Momentum Monday 17th April 2023

16th Apr '23 by Elio D'Amato

3 comments 573 reads

The end of the shortened week was fairly uneventful, despite news the economic landscape is not changing for some time. More on that in a moment.

For those that may be reading this contribution for the first time, do note that within this contribution we discuss all things Momentum. This includes price moves as well as big macro themes from the perspective of how they may impact sentiment.

You don’t have to read all of it. We have broken up this report into three distinct sections so you can go to the topic you prefer.

Broader market sentiment
Stocks of Interest
52 week high screen

For those that have followed my pursuits in the past, you will likely know me as a fundamental analyst by trade. Despite my corporate and personal success applying that, I experienced an epiphany after becoming a self funded human following my departure from my previous employer. I added an element of Momentum to my strategy - more as a strategy to protect my capital. I documented this journey in a series of three articles that members can access here:

Article 1 Please read here
Article 2 Please read here
Article 3 Please read here

There are many faiths in this church we call investing. We do not judge or assume anything. We are not dogmatic, nor are we too precious and proud to dismiss reality. This is the market after all, and the moment you think you have mastered it, you will be humbled.

Enjoy this regular part of your membership, on top of all the other articles that we may write. You can access them by clicking on “Discuss” in the left hand column and selecting “Aus/NZBlogs” (see below)

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Broader Market

JUST A REMINDER: I do not use the market charts to make decisions as to when to buy or sell stocks. I will always use a stock’s individual chart to do that. However, I do look at the market charts to get a sense as to how aggressive/cautious I can be when trading/investing individual stocks.

S&P500

A positive week for the broader S&P500 and technically based on closing prices, the market closed at a very…

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Jonner

17th Apr '23

The Momentum Rank

Rough and ready momentum analysis might be viewed with a sp crossing 30dMA do you think?

Earnings momentum is interesting if there is a way to quantify foresight - your Momentum Rank (a blend of price momentum (52 week highs, relative strength) and earnings momentum (recommendation upgrades, earnings upgrades and earnings surprise) factors.) However there are examples where a company can be shut down by govt decree via a breach of some war sanction, and still have a moderate momentum ranking, so is not wholly reflected in momentum risk (other than front-running dump sp collapse). Hence company announcements that state existential crisis... a part of market inefficiency in widespread knowledge realisation, but potential lag in value/price discovery.

How does Stockopedia include a detrimental announcement immediately without waiting for broker downgrade 'recommendations' to filter through?

A fourth Rank would be very useful, and some offer services (there is one in UK), and that would be a Macro Momentum Rank that would consider LIQUIDITY and to a lesser extent related bond real rates - the cost of money. That is tracking liquidity waves, in respect to global liquidity. For example US treasury has largely depleted reserves (fiscally) in a political battle to offset Fed tightening (monetary). Included could be some economic indicators that have a history of stock market prescience. Covering investing during prevailing investment conditions: stagflation, disinflationary, inflationary, recession/depression etc.

Of the few advantages that an individual investor has includes nimbleness. The average investor does not short, such as the hedge fund can, that also wants retail to behave to their advantage.

I look forward to considering what you have to say, reading your journey in the series of three articles above.

Elio D'Amato

18th Apr '23

Hi Jonner, Thanks for the follow on comments.

Yes there is a common belief among many swing/momentum traders that the price has got to be above a moving average to be even considered. Most commonly the 200 MA is used. There is also the 50 day. The only problem for some (not all) is that as a standalone indicator this may be unacceptable - especially as an exit signal - as the drawdown (ie the pullback from the top to the price move) can be too large. Take for example Corporate Travel Management (ASX:CTD) The price at the time of writing my response is $21.21. For the price to cross below the 200 day average it would have to fall to $17.71 which to some may not be acceptable (it is not for us to judge whether this acceptable or not. We just accept that for some this may not be appropriate. )

Of course we can make that tighter using 30day, but then that introduces the risk of whipsawing (jumping in and out) when the price moves only a small amount. For now I have my approach which suits me. However in time I can probably see a point where I will still use my structural points of support and resistance, though I will add a 200 day MA rule where the price must also be above the 200 day MA (just like I do with the 2.5x ATR, but note... I am a more active trader than most so it suits me.

As for the Momentum Macro Rank, the only problem to consider is Stockopedia works on a relative basis. So if we were comparing Macro Ranks... who does Australia compare itself too? The US, UK, EURO, Remember these comparisons are important because at its core the Stockopedia ranking method needs them. Eg if company ABC has an EPS of -10cps but the remainder of the markets has EPS of -11cps to -123cps then company ABC will still rate highly, because even though it is poor it is better than its peers.

This would mean every economy looks better than the US, because let's face it, they are broke. Yet over the last 10 years the S&P500 smashed the ASX and FTSE100 etc

I am not trying to dismiss the thought, but it goes to the heart of what I am doing with the momentum strategies I apply to a portion of my portfolio.

My trading mantra is, "think less - make more money." I know intimately the trouble economies are currently in with debt fueled increases in disposable money which is now slushing around the economy like an inflation elephant in my bath tub... but if I listened to that logic back when the printing presses were at full steam, I would have missed out on my best year even year in 2021 which was counter intuitive to everything one learns as a neo-classical economist.

From a trading view I am not taking the view that I have to pick tops and bottoms. All I want to do is be in the chunky bit that goes up, and avoid the chunky bit as it goes down. So if there is something economic on the horizon then that will be reflected in the price of stocks well before the economic data turns. Even in the COVID correction (which in terms of pace was quicker than 1987), the All Ords fell from circa 7150 to 6500 in a week. That was still better than the 4500 it got too and many small caps of course did worse.

What you mention in regards to our nimbleness is 100% accurate and is a great advantage which is why momentum works. When I managed $700m in managed funds we didn't have that luxury, when we were in, we were in it for the long haul - better or worse.

As for shorting, personally I like the maths of going long. On a long trade my maximum potential gain is infinite. On a short trade, I can make 100%. Of course there is the potential one day to establish a long/short fund using the metrics from Stockopedia.... but that is a discussion for another day.

Thanks for the chance to comment.

Jef Chambers

5th Jul '23

Infratil (NZE:IFT) Infratil currently qualifies for Altman Z-Score Screen (Short Selling) - I'd be interested to know your thoughts regarding the concern that indicates? Many thanks

Momentum Monday 17th April 2023

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Elio D'Amato

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