There are many investors who watch out for shares hitting new 52 week highs which highlight momentum and very often “things going on behind-the-scenes”. In some ways it is easier for shares to push ahead when markets are buoyant and investor sentiment is strong. The situation is very different when markets are volatile and moving down. So, in many ways the current volatile market conditions in the USA should place more focus on shares hitting new 52 week highs. Don’t ignore share price highs in these difficult markets!
Recovery and growth
When shares hit new highs the underlying companies can be either in a process of recovery or a new growth phase. Either way the share price movement shows that investors are keen on the company and there would appear to be many reasons to be optimistic going forward. What you will find in more difficult markets is that the number of shares hitting new 52 week highs will fall dramatically. In many ways this does momentum investors a favour because it can separate the wheat from the chaff allowing you to focus on the shares which are still showing strength in difficult markets.
While share price momentum, on the upside and the downside, is an extremely important indicator about an underlying company, you still need to do your research.
Open-minded
We all have our favourite companies, our favoured sectors and sometimes we will ignore areas where we are unsure or perhaps we have struggled with in the past. In some ways this can significantly reduce your chances of making money from momentum shares and if possible you should go in with an open mind. Ignore what has happened in the past, do your research and if the figures stack up and there does seem to be more potential then consider an investment.
Those who put their hands over their ears and refuse to listen to what the markets are telling them could be making a major mistake. It is very easy to let historic actions impact your views on a particular company but companies can change, as can their prospects.
Calculated risk
If you do manage to find a company which looks interesting then you need to take a look at the potential risk/reward ratio. There are obvious risks with any investment and therefore you need to be careful about any potential exposure and how this may impact the risk/reward ratio of your overall investments. It is all good and well taking significant risks when markets are flying high and your stocks are doing well but what happens when markets turn down?
There is a middle ground between those who are overcautious and those who like to take on excessive risk. Go into these transactions with your eyes wide open, do your research and have yourself a target in mind. Any investment has the potential to hit a level where it is fair value or maybe even overbought. This may allow you to bank a profit and move onto the next investment which could offer more potential.
Some investors will trade quite regularly while others may review their investments periodically while obviously keeping a close eye on the markets in between. The simple fact is that we are not all the same and if we were what a boring investment market it would be!