Stockopedia’s own data points to a jarringly simple stock market truth amidst the daily whirlwind of financial data: share prices that have gone up tend to keep rising.
It sounds too good to be true, and that's probably a part of why some people distrust this momentum effect - surely successful investing can’t be so easy? One of the most convincing explanations for this stock market factor is the conservatism bias - the idea that people are slow to revise their expectations when presented with new information.
That means that when the market finds a stock breaking new all-time highs or beating broker estimates it tends to undervalue this development. The rational investor can take advantage of this mispricing. Stockopedia’s Momentum Rank is a convenient way of summarising the momentum attributes of a stock - let’s use Lloyds Banking (LON:LLOY) as an example.
How to spot Momentum opportunities
The Momentum Rank is inspired by the latest research into momentum from leading academics (including Jegadeesh and Titman, George and Hwang, and Seung-Chan Park) and is based on a composite of proven Price and Estimate Momentum metrics.
Each company in the market is ranked from 1 to 100 for each of these momentum ratios and a composite score is calculated as a weighted average of all valid values. Applying this to Lloyds Banking yields a Momentum Rank of 53 - a positive result, although there are higher momentum stocks out there.
Studies indicate that combining factors such as Value, Quality and Momentum is a more effective way of outperforming the market over longer time frames. That's why we have constructed our StockReports to give an instant impression of how well exposed Lloyds Banking (LON:LLOY) is to these three factors. We go into greater detail on factor investing in this video.
Stockopedia helps you to identify return-enhancing factors such as Quality, Value and Momentum by analysing thousands of data points every day. To find out more about you find investment opportunities and analyse your portfolios then take one of our two-week free trials and have a look around.