Momentum is sticky and persists for longer than investors tend to anticipate. The downside of this is that stocks with recent negative momentum are likely to continue heading down.
This holds true on average, although there are, of course, exceptions. Trends reverse from time to time, but more often they stay the same - hence the name.
The conservatism bias is the idea that people are slow to revise their expectations when presented with new information. That means that when the market finds a stock plumbing new lows or missing broker estimates it can sometimes 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 Royal Bank Of Scotland (LON:RBS) 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 (you find out more here).
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 Royal Bank Of Scotland yields a pretty poor Momentum Rank of 23. This is a negative for Royal Bank Of Scotland so care should be taken if you are considering buying into this stock.
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 Royal Bank Of Scotland (LON:RBS) 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.