Its interesting how a market has a feel, a 'rhythm' to it. Amazing how you could feel this recent strength develop, extend and now begin to feel a bit tired. Its also amazing how quickly the momentum changed from gloom and doom from asia, clinton and Iraq to record highs....its also scary what could happen to this Dow Driven beast if momentum swings back again. I don't think we've turned the corner just yet and might see continued surge if earnings for the quarter come in line or in line with reduced expectations, but we have definately gotten sluggish the past three days.
While I am not a huge fan of momentum investing, the basics of momentum investing whether utilized or used piecemeal in your own system are important to understand. Momemtum investors typical will wait for the volume and price action to come into a stock/sector, then simply continue to buy/ride the sector as it moves one way or the other, often going to extremes, until it breaks. Then when it breaks, they will say goodbye, often going short the sector, captilizing on the excesses and striving to make money on both sides of the movement.
To properly track movements, I feel that a sector analysis is important, ie. you need to have your stock screens broken into sectors/industries, such that all pcmakers are grouped together, semis together, disk drives, networkers, steel companies, pharms, health care, retailers, etc., the sector participants grouped together with leaders to the top. Then, by simply looking at your screen, you can see at any given moment where the money is flowing, whether it be in or out of any of the sectors you are tracking. Thus if money looks to be flowing into semis on a bad day, after the market feels to bottom and you believe a rally might be coming, you might key in on the leaders in the semi, wait for them to break higher, then go down the list, looking for something that has room to move.
The above example references a short term day trade, but the philosophy can extend to position trading and longer term investing as well. Momentum investors, for instance, would not have sat with the Steel companies for the past year where, as a value play, they looked attractive, something that could perform in a 18 month time frame. 18 months to a trader is a lifetime. A momentum trader might have missed the lows on Bethlehem Steel at 8ish last year but would have seen the action in the whole sector coming in at 10 just a few weeks ago and would have jumped on board.
As a return on investment,the investor buying at 8 now has a stock at roughly 15, almost a 85% return. The investor at 10, has only a 45% return, nonetheless, the momentum trader had use of the cash for 11 of the last 12 months and annualized, their return is not much better.
By no means am I true momentum investor. I feel this market is overextended and yet its inertia continues to move stocks higher. Given the brutal punishing some stocks have faced given mild disappointments, I have been acquiring longer term, position trades, utilizing more bottom fishing/value oriented strategies. These are for "investments", although with the exception of Mrk, WLA and Dell, I don't think I have owned anything in the past 5 years more than ten to 15 months and that would be exceeding my average of 4 to 8 weeks. This also doesnt include day trades. NOnetheless, as any trader will tell you, the trend is your freind. Just be careful, because sometimes the trend turns on a dime and if you were the last one on, you're taking losses when it turns. Good momentum traders will also tell you that when the momentum turns, get out. Don't wish it back, dont "wait just one more day", close the position. Take your losses small and live to fight another day. You initiated the position as a trader, looking at momentum, don't now become an investor, dont now start talking fundamentals, PEs and the 5 buy recommendations that Goldman Sachs and Paine Webber have on your issue.
Side note, Irby's thread is an excellent one and offers some good insight into mechanics of day trading as well as good analysis of various product offerings available for online traders.
I host a thread as well which offers a forum for asking questions about execution systems, the marketplaces, etc. the kind of stuff you don't read about in the usual literature. Subject 15612
I also stop in regularly at Ken's chat site and find it to be a valuable resource for traders. Its a great way to get a feel, a pulse on the mood of the market, as well as extend your tenticles so you can see/hear/discuss stocks you otherwise wouldnt even know existed. For the trader secluded at home, this is critical since synergies to add value. DEFINATELY, take Ken up on his free trial.
Regards,
Steve@yamner.com
Head Trader, Yamner & Co., Inc. yamner.com |
