Momentum factor is most powerful in the Australian share market. Picture Getty
Hot Money Monday: ASX is best place in the world to profit from momentum strategy, says this fundie
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A momentum trader will essentially be “buying high, but hoping to sell even higher” – which is the counter to the well known strategy of “buy low and sell high”.
The biggest question for momentum traders is therefore how to find those stocks before they make an even bigger move.
But does the momentum trading strategy work in every market?
Peter Brooke, head of quantitative investments at Platypus Asset Management, told Morningstar that the momentum factor is the most powerful in the Australian share market, much more so compared to global markets.
“It’s very strong in Australia, momentum is not as strong in the S&P 500, and that’s why you need to take account of it in Australian equity portfolios,” Brooke said.
But why is that?
According to Brooke, a possible explanation is culture.
“We have a culture more focused on the short-term, and that feeds in to the Australian investor sentiment,” he explained.
Other possible explanations for the strong performance of the momentum strategy here in Australia include the high participation of retail investors.
“Academic literature and our own research suggest that stock price momentum is, on average, the best performing factor in the Australian share market,” Brooke added.
To be a successful momentum trader therefore, one needs to be able to identify the best stocks quickly and accurately.
The goal for momentum traders is basically to enter into trades at key points in the trend in order to maximise profits.
Fortunately, there are several indicators to quantify those key points, and here we look at three main signals used by the market:
- 52-week high
- Simple Moving Average
- Relative Strength Index
10 ASX small caps nearest or at 52-week highs
Traders often view the 52-week highs as entry signals.
This is due to what’s called the “52-week high effect” – where if a price has broken out above its 52-week range, there must be some factor that generated enough momentum to further continue the price movement in the same direction.
On the other hand, if a stock is far away from its 52-week high, chartists believe the momentum will continue going that way.
10 ASX small caps at 52-week high
(data from Commsec)
| Code | Name | Price | How far from 52-Week High? | 1 mth return | 6 mth return | 12 mth return |
|---|---|---|---|---|---|---|
| EVE | Eve Health Group | $0.001 | 0.00% | 0.00% | 0.00% | 0.00% |
| RIM | Rimfire Pacific Mining | $0.032 | 0.00% | 68.42% | 255.56% | 300.00% |
| BLY | Boart Longyear | $2.970 | 0.00% | 5.32% | 96.69% | 55.50% |
| GNX | Genex Power | $0.185 | 0.00% | 5.71% | 42.31% | 19.35% |
| BHD | Benjamin Hornigold | $0.260 | 0.00% | 1.96% | -- | 18.18% |
| MIL | Millennium Services | $1.115 | 0.45% | 2.29% | 271.67% | 189.61% |
| IPX | Iperionx | $2.230 | 0.45% | 48.67% | 106.48% | 141.08% |
| WGB | Wam Global | $2.100 | 0.47% | 6.06% | 7.14% | 14.44% |
| NAM | Namoi Cotton | $0.493 | 0.51% | 1.55% | 14.53% | 9.44% |
| VLS | Vita Life Sciences | $1.960 | 0.51% | 3.70% | 32.43% | 28.95% |
Eve Health Group (ASX:EVE)
The nutrition and wellness company recently said it was in the advanced stages of finalising a sale of its Jenbrook tea tree assets located in Northern NSW.
The company has already received one conditional offer for the properties, and is in negotiations with the party.
EVE is expecting formal offers from other parties in the coming weeks, and expects to finalise the divestment in the next three months.
Additionally, EVE has agreed to enter short term, unsecured loan facilities with the management of the company for a collective facility of $150k, with managing director Bill Fry agreeing to provide $50k of the facility.
Rimfire Pacific Mining (ASX:RIM)
Rimfire is focused on exploring for critical minerals that are associated with global decarbonisation strategies.
Recently, Rimfire commenced a 4,000 metre aircore drilling program at the Murga Scandium Prospect, which is located on the company’s Fifield Project approximately 70km northwest of Parkes in central NSW.
The aircore program will determine the extent and continuity of scandium mineralisation across the 20km2 Murga Intrusive Complex.
10 ASX small caps with prices above SMA
Simple Moving Averages (or SMA) is another indicator that can be used to gauge momentum.
SMA is often used to determine whether a stock price will continue in the same direction, or if it will reverse a bull or bear trend.
As a general rule, if the current stock price is above the SMA, the price trend is up. If the price is below the SMA, the trend is down.
10 ASX small caps at prices above SMA
(data from Commsec)
| Code | Name | Last Price Value | Price vs. Simple Moving Average | Price vs. 20 day SMA | Price vs. 50 day SMA | Price vs. 200 day SMA |
|---|---|---|---|---|---|---|
| BTR | Brightstar Resources | $0.01 | >5% Above SMA | >5% Above SMA | 0 to 1% Above SMA | 1 to 5% Above SMA |
| FL1 | First Lithium | $0.29 | >5% Above SMA | 1 to 5% Above SMA | < -5% Below SMA | 1 to 5% Above SMA |
| BP8 | BPH Global | $0.00 | >5% Above SMA | 0 to -1% Below SMA | 0 to 1% Above SMA | -- |
| ARU | Arafura Rare Earths | $0.14 | >5% Above SMA | 1 to 5% Above SMA | < -5% Below SMA | < -5% Below SMA |
| ATP | Atlas Pearls | $0.21 | >5% Above SMA | >5% Above SMA | >5% Above SMA | >5% Above SMA |
| AUZ | Australian Mines | $0.01 | >5% Above SMA | >5% Above SMA | >5% Above SMA | < -5% Below SMA |
| MRD | Mount Ridley Mines | $0.00 | >5% Above SMA | 1 to 5% Above SMA | 1 to 5% Above SMA | < -5% Below SMA |
| GSR | Greenstone Resources | $0.01 | >5% Above SMA | 1 to 5% Above SMA | 1 to 5% Above SMA | < -5% Below SMA |
| BLZ | Blaze Minerals | $0.01 | >5% Above SMA | 0 to 1% Above SMA | < -5% Below SMA | < -5% Below SMA |
| M4M | Macro Metals | $0.00 | >5% Above SMA | 1 to 5% Above SMA | -1 to -5% Below SMA | < -5% Below SMA |
Atlas is one of the world’s leading producers of the high quality white and silver South Sea pearls.
The company recently announced the resignation of CFO Gemma Cann, who finished with the company effective 7 February.
Temporary arrangements which were put in place to cover a period of extended maternity leave taken by Cann will be continued.
Greenstone Resources (ASX:GSR)
Greenstone, a gold explorer, has been rising since announcing a merger with Horizon Minerals (ASX:HRZ).
Under the deal, Horizon will acquire 100% of the shares in Greenstone, and 100% of the listed Greenstone options, subject to the satisfaction of various conditions.
Each Greenstone shareholder will receive 0.2868 Horizon shares for every Greenstone share held.
Horizon shareholders will own 63.1% of the merged entity, while Greenstone shareholders will own the remaining 36.9%.
10 ASX small caps with low RSI (Oversold)
Here’s another momentum signal used by the market – the Relative Strength Index (RSI).
RSI is a measure of the strength of a stock’s momentum, either in the upward or the downward direction, and is used to indicate whether a stock is oversold or undersold.
Generally speaking, an RSI above 70 means a stock is overbought; and an RSI below 30 indicates that it’s oversold.
An RSI above 80 meanwhile is strongly overbought, and an RSI below 20 is strongly oversold.
10 ASX small caps at prices with RSI Oversold signal
(data from Commsec)
| Code | Name | 2 Day RSI | 9 Day RSI | 14 Day RSI |
|---|---|---|---|---|
| WNR | Wingara Ag | Oversold | Oversold | -- |
| CMP | Compumedics | -- | Oversold | -- |
| GRV | Greenvale Energy | Oversold | Oversold | -- |
| UNT | Unith | Oversold | Oversold | -- |
| ST1 | Spirit Technology | Oversold | Oversold | -- |
| UBI | Universal Biosensors | Oversold | Oversold | -- |
| GDA | Good Drinks Australia | Oversold | Oversold | -- |
| ZMM | Zimi | -- | Oversold | -- |
| LCL | LCL Resources | -- | Oversold | Oversold |
| SLR | Silver Lake Resources | -- | Oversold | -- |
Silverlake Resources (ASX:SLR)
SLR has been falling since announcing a merger with gold producer Red 5 (ASX:RED) that is set to create a mid-tier gold company producing around 445,000 ounces per annum.
Silver Lake already has 11% stake in Red 5, and the combined company will be valued at $1.5 billion.
Under the deal, each Silver Lake shareholder will receive 3.434 Red 5 shares for every Silver Lake share held.
Upon implementation, Red 5 shareholders would hold around 51.7% of the merged entity, while Silver Lake stakeholders will own the remaining 48.3%.
The AI-focused media company recently reported a valuation increase of its investment in AudioStack (previously Aflorithmic Labs) to $3.9 million from $2.0 million at 30 June 2023.
AudioStack completed a £2.5 million (approximately $4.1 million) pre-Series A funding round led by Quadri Ventures.
The funding round was completed at a pre-money valuation of US$27 million (approximately $41 million), providing an uplift in the implied post-money valuation of UNITH’s 9.7% investment in AudioStack.
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