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The momentum phenomenon has been a fixture in the US equity markets for decades. There are two types of momentum to consider: absolute momentum and relative momentum. Absolute momentum refers to the underlying trend, up or down. Relative momentum quantifies the strength of the uptrend and compares it to other stocks in the index. A dual-momentum strategy uses both types of momentum to trade the strongest stocks in an index. Let’s look at two examples.
The chart below shows Nvidia (NVDA) with its 200-day SMA on the price chart and the Percent above MA (1,200,1) in the indicator window. NVDA moved above its 200-day SMA in January 2023 and remains well above this long-term trend indicator. Absolute momentum is bullish, which means the stock is in an uptrend.
We now need to quantify the strength of this uptrend. The indicator window shows the percentage difference between the close and the 200-day SMA. This indicator gives us a “number” we can use to measure the uptrend and compare performance. For example, the close was 20.38% above the 200-day SMA on December 7th. Percent Above MA is one of 11 indicators for the TIP Indicator Edge Plugin (here)
The next chart shows Tesla (TSLA) for a comparison. TSLA was also above its 200-day SMA on December 7th and in an uptrend (absolute momentum). Relative to NVDA, however, TSLA was not as strong because it was only 7.95% above its 200-day SMA.
I chose December 7th because that is when the Composite Breadth Model at TrendInvestorPro turned bullish and our momentum strategies became fully invested. We run Dual Momentum Rotation Strategies for Nasdaq 100 and S&P 500 stocks. Both strategies chose NVDA as one of the ten stocks for their respective portfolios.
These strategies performed very well from early December to mid February with big gains coming from AVGO, CRWD, PANW, LLY, META and NVDA. Like the broader market, these strategies are extended and ripe for a pullback (drawdown). I am not looking to time a pullback or drawdown, but would note that drawdowns can provide opportunities to enter strategies. Click here to learn more about our strategies and see detailed performance metrics.
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