What drives momentum | stockbee

5/22/2013

What drives momentum

Momentum moves are triggered by some news. A surprisingly good or bad news often leads to start of a momentum move.

This kind of move can be of many types. But the one news with potentially big impact is earnings news. Earnings have the potential to lead to start of multi month or multi year moves.

Sector is another big catalyst. If a sector move gets going the good , bad and ugly companies in it can make big moves. You will see that in solar stocks currently. There are bubble type momentum bursts in these stocks in last few weeks. If you look at the fundamentals of many of these stocks, you will see that they are terrible and likely to be terrible for foreseeable future. But momentum does not care about it.  If a stock has momentum you need to keep all other logic aside and just look at it as trading candidate.

In industries with long order to production or implementation cycle, news of new order can lead to start of big moves. This is also common in project based industries like heavy construction, defense, aerospace and infrastructure. 

The biotechs are a class by themselves. There are two types of biotechs in market. The bigger established companies like AMGN, BIIB, CELG, REGN, VRTX and ALXN have real revenue. The second category of biotechs are developmental stage biotech that trade mostly based on expectations of FDA approval or results of clinical trial.

The cyclicals trade based on expectations. They rally ahead of their actual earnings improvement as market participants can anticipate good times. When they have good earnings, they might be about to top. These are deep cyclicals and many of them like coal, shipping, heavy construction  commodities can go through multi year boom burst cycle. Currently the commodities are going through burst cycle while 7 or 8  of years ago they were in big secular up trend.

Besides these catalyst there can be many other catalyst like govt policy change, wars, drought, terrorist attacks, disease outbreak and so on. You will see stock moving based on these kind of news if the news is game changer. Post 9/11 the market was closed for many days. Once it opened one small company InVision Technologies, Inc. (INVN  was the ticker for it that time. Has been bought subsequently by GE)had a big high volume breakout. That started the big rally for the stock, it went up 100% in few quarters.

When you look at the top 25 stocks by momentum , try and find what was the catalyst at beginning of each of these moves. That way you can build skill to identify a future momentum leader.

Top 25 stocks by momentum

  1. yrcw
  2. vrml
  3. tsla
  4. scty
  5. csiq
  6. rvlt
  7. rsol
  8. nbg
  9. ecty
  10. ostk
  11. llen
  12. esi
  13. spwr
  14. tmus
  15. htch
  16. iqnt
  17. eac
  18. evc
  19. egle
  20. unis
  21. regi
  22. mobi
  23. byd
  24. nvtl
  25. noah

As of now the top 25 stocks by momentum are dominated by the solar industry stocks. Many of them had reversals yesterday due to analyst  downgrades. YRCW the trucking company continues to hold its top rank. LLEN out of this is having a pullback and I am watching.


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