In this article, we will explore the concept of momentum in investing and how it can help you make clear decisions without any bias or ambiguity.
Understanding Zomato’s Journey
To better understand the effectiveness of momentum trading, let’s take a look at the example of Zomato Limited, a well-known food delivery company. Zomato’s stock experienced significant fluctuations over time. It initially listed at around Rs120 and reached a high of Rs170 before crashing down to nearly Rs40. It then consolidated for a prolonged period in the range of Rs 40-60. However, starting from April and May of 2023, the stock began to show a positive upward movement and even posted a small profit in July. Furthermore, in the following quarter ending in September, it continued to demonstrate profitability.
This stock’s journey illustrates an important principle – the market often anticipates changes in direction and trend before they occur. Despite initially having high valuations and market expectations in 2021, Zomato’s stock price collapsed. However, the price began to rise well before any positive earnings news was released. This phenomenon highlights the power of the momentum strategy in identifying trend changes.
Momentum can be a solid method to identify potential opportunities. Momentum strategies focus on identifying stocks that are exhibiting a trend towards higher or lower prices. By investing in stocks that have shown consistent price movement in a particular direction, momentum investors aim to capitalise on the continuation of that trend.
This is evident in the performance of Zomato within the Mi NNF 10 and Mi EverGreen strategies. Zomato’s stock has shown an impressive 42% increase since its inclusion in the Nifty Next 50 index in April. By fulfilling the criteria of being high up in the momentum ranks, Zomato was selected as one of the candidates within the Nifty Next 50 stocks.
What makes the momentum strategy valuable is its ability to minimize emotional bias and guesswork. It allows traders to act based on concrete data and market dynamics rather than relying on mere speculation. In the case of Zomato, investors who followed the momentum strategy could have exited the stock with a minimal loss if it had declined.
Earnings reports typically provide information about a company’s financial health and are essential factors for investors to consider. However, it is crucial to note that earnings reports are often released with a slight delay, reflecting the company’s performance in the past three months.
In contrast, the market is forward-looking. It reflects the collective perception and expectations of participants regarding a stock’s future prospects. This is what momentum hopes to capture as a result of reflection of forward looking optimism in price trends in the current context.
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