Momentum Trading: Good or Bad

Momentum: Good or Bad?

 

 

To be sure, momentum markets are exciting, and very profitable. But they have a limited lifespan and they always end up badly. One of the most dramatic momentum runs of all time was the last six months of the Internet bubble, the period from September 1999 to March 2000. The Nasdaq rose 86.4% during the period, and it seemed as if the market would never fall again. Of course it did, and the Nasdaq Composite, despite a nifty rally since March, is still off 65% from its March 2000 peak.

Momentum is a double edged sword. When it's going your way, it feels good. The problem is that it's not going to last forever. And the damage, not to mention the hangover could both be devastating and long lasting.

As traders and investors, it's foolish to fight a strong tape. Thus, we have increased our exposure to stocks over the last few weeks, and we have several positions that are acting well.

There are no signs, at this point, that the stock market will do anything other than have an occasional moderate day or two off here and there.

We see no technical divergences to worry about too much at this point. Volume, breadth, and momentum are all headed in the right direction. And sentiment is nowhere near the total euphoria that marks major market tops.

The S & P 500 looks on course for the 1000 area, where there will be some backing and filling. Even a pullback of several days is possible there, as well as a failure of the rally. But until the 1000 area is near, there is nothing to do but stay with the trend, which is up.

The caveats are always there, external events, especially political insanity, in Washington or elsewhere, as we have listed above.

For now, the best course is to stay with the trend, and to continue to monitor events with a very cautious eye.

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