Using The Position Increase/Decrease Filter to Build a Momentum Strategy

Newton’s first law of motion tells us that, in essence, a body in motion will remain in motion and a body at rest will remain at rest. This concept forms the underpinnings of a momentum investment strategy. This approach seeks to build wealth by purchasing securities with established uptrends. KINFO's Position Increase/Decrease filter can help.

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Identifying the Trends

Those who subscribe to a momentum strategy believe that a stock experiencing share price appreciation will continue to perform well. Simultaneously, they expect falling companies to continue their slide. Often, momentum investors are concerned with short-term movements and seek to capitalize on trends early. Does it work?

There is a body of compelling evidence indicating such a strategy can, in fact, work. A 2011 study published in Springer Science found that particular momentum strategies are effective in delivering consistent returns. Some posit that an emotionless approach forms the basis of success within the strategy. Broad market sentiment and headlines do not influence momentum investors. Instead, they look for technical indicators when making decisions.

KINFO Data for the Momentum Investor

Within the “Hedge Fund” page of KINFO users will find a filter for position increases/decreases. This tool enables users to view a ranked list of stocks based on the number of funds increasing their holdings of a particular company. This ties into a momentum strategy because these funds are often leveraging technical analyses to build growth.

The higher a stock ranks on this list, the more pervasive the positive outlook is for share price appreciation. Not surprisingly, the companies found at the top of this list are steady performers with a history of growth. Many investors will notice that blue chips dominate the ranking.

On the other side of the coin is the decrease filter option. This feature will supply data ranking securities most frequently eschewed by managers. This information is valuable to those seeking to limit downside risk and avoid companies widely expected to decrease in value.

Going Deeper

In some cases, a stock will rank high on both the increase and decrease list (e.g. Apple, Microsoft, Johnson & Johnson). This dual ranking occurs when many funds disagree on the prospects of a company. KINFO users can distil value from these contradictory signals using the increase/decrease percent tool. This option clarifies the data by looking at the degree to which funds have opted in or out of a company. This data is different than the ordinary increase/decrease feature because it goes deeper and compares to what extent those with a positive outlook on a stock are exposing themselves to the risk of ownership.

How many stocks does an investor need to reach a maximum level of diversification? Experts disagree. However, researchers at firms like Invesco favor a focused approach on fewer winners because they believe, “the more diversified portfolios become, the more likely a portfolio manager is to move towards market or benchmark returns.”

The basis for this idea is research showing that the strategy of diversification to eliminate risk becomes less efficient with each added holding.

For example, perhaps 50 funds have increased their holding of Apple and 50 have decreased their holding of the same stock. This stalemate isn’t helpful to momentum investors seeking clues. However, the percent increase/decrease filter may show that the 50 funds increasing their holdings are doing so to a significant degree. In the meantime, the 50 funds decreasing their position in the company may just be shaving a few shares off.

There are as many investing strategies as there are investors. The most important takeaway is that you embrace a style and approach that suits your appetite for risk. KINFO is there to help you find the analytics you need to execute your plan.

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