How Momentum Shows Up in Markets
In September 2019, the first “Just in Time” article was published in the form of a Johannesburg Stock Exchange (JSE) market momentum report. The principle of market momentum measures how far market price moves in relation to a moving average. A large percentage price movement away from a moving average suggests that there is price momentum. Market momentum signals present opportunities to exploit price changes for profit.
Long term momentum is a valuable indicator to help investors allocate capital to markets. The chart above represents the weekly price of the All-Share Index (J203) since 2007. Notice the long upward trend from post-2008 until August 2014, where the price is consistently above the moving average lines. From August 2014 until March 2020, the market largely moves sideways where the moving averages and price track each other closely.
The chart above represents the same price data in the form of a momentum chart. The chart illustrates the data as a percentage measurement away from the 36-month moving average. Notice the upward momentum trend that ends in August 2014. A long-term downward trend ensues. Recently, in November 2020, the market broke the downward momentum trend. The breakout represented the right time to increase exposure to the All-Share index. However, the momentum has stalled. One might say, “too much, too soon”. The momentum stretch is not at all-time highs, but it is somewhat stretched. Reversion to the mean is likely. That will show up as a passing of time with little change in price or a decline in price back to the 0% level. Either way, my crystal ball suggests there are unlikely any significant market gains in the short term until year-end.
Justin Spencer-Young
