Strategy
Growth
Australia

ASX Momentum Strategy

16 Nov 2020
By
The ASX Momentum strategy works on the idea that stock prices that have risen significantly over the past, relative to their peers, tend to continue to outperform. This is known as the momentum effect and has been examined extensively in the academic literature. This strategy takes advantage of this effect by buying the top momentum stocks in the S&P/ASX 100 index.

Minimum Investment Amount and Period

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Period

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Stock codeStock nameSectorCurrent priceReturn 12mMom rank
NVDA
NVIDIA Corp
Information Technology
$549.46214.71%
1
AMD
Advanced Micro Devices Inc
Information Technology
$84.48199.75%
2
DXCM
DexCom Inc
Health Care
$374.89177.95%
3
ETSY
Etsy Inc
Consumer Discretionary
$134.56144.28%
4
AAPL
Apple Inc
Information Technology
$113.16113.35%
5
REGN
Regeneron Pharmaceuticals Inc
Health Care
$581.64107.25%
6
SWKS
Skyworks Solutions Inc
Information Technology
$147.27101.64%
7
WST
West Pharmaceutical Services I
Health Care
$290.33100.43%
8
NOW
ServiceNow Inc
Information Technology
$491.5499.52%
9
PYPL
PayPal Holdings Inc
Information Technology
$191.6697.47%
10
NFLX
Netflix Inc
Communication Services
$505.8796.81%
11
QRVO
Qorvo Inc
Information Technology
$131.0889.28%
12
AMZN
Amazon.com Inc
Consumer Discretionary
$3,099.9688.02%
13
ADBE
Adobe Inc
Information Technology
$478.9887.32%
14
CTLT
Catalent Inc
Health Care
$88.8583.45%
15

ASX Momentum Strategy

The ASX 100 index contains the largest 100 companies listed in Australia and therefore provides an excellent pool to find large capitalisation stocks that may exhibit the momentum effect. By searching this universe for stocks that have risen the most over the prior 6 to 12 months, we are banking on the previous momentum persisting for a good proportion of the chosen stocks.

Of course, not all trades will be winners, but according to the back-testing, the strategy closes 54.5% of trades with a profit and produces an average return of 17.9% for these trades. On the other side, the average loss per losing trade is only -6.8%. These statistics show why the strategy can produce a market-beating return over the long term, but they also show that it only works when an investor buys the entire portfolio. Picking and choosing individual stocks from this table has a reasonable probability of selecting a losing trade. Similarly, adjusting the portfolio when the strategy re-balances each month is essential to make sure you hold the optimal portfolio of stocks.

How To Follow This Strategy

Rivkin’s strategies are designed to be as easy as possible for investors to follow. To follow the ASX Momentum strategy, investors need to buy the stocks in the above table in equal weights. Weights can drift over time as stock prices move, but we only recommend re-balancing stock weights if they stray too far from the target weight (20% per stock). The stock volumes shown in this table are based on a $5,000 investment per stock which produces a $25,000 portfolio.

Once per month, the list of stocks will be updated in what we call a ‘re-balance’. This means investors will need to look at the new list and sell any stocks that are no longer on the list. After these stocks are sold, the new stocks from the current table can be bought.

About The Strategy

The ASX Momentum strategy was developed by Rivkin during 2015 and was rolled out as a strategy to clients in May 2016. Extensive back-testing was done to create and refine the strategy, and it is this back-testing that we rely on to give us increased confidence about future expectations. Please click here to find out more about the strategy.

Important notice:

Quantities and calculations in this post use the Rivkin Model and might differ from yours. This post does not constitute an invitation to buy or sell any securities. Before conducting any transaction, make sure you fully understand the terms of the product and the relevant risk factors involved. You can seek professional advice to determine the appropriateness and cost of any transaction from the broker you use.

SHOW COMMENTS / QUESTIONS (8)

8
Comments

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Terence C.

Hi, I am a relatively new member to Rivkin. I have a general question regarding, Momentum, Value and Blue Chip stratergies. When is it too late to buy the recommended stocks once they have moved above the initial purchase price ? For example, would it be too late to buy APT considering the amount it has risen. Meaning, when is the cut off for buying these stocks that have well and truly left the starting gate. Notibly, with the Event Stratergy you set a limit. Thanks Terry

Oliver Gordon

Good Morning Terry. With each of our strategies that take a ‘portfolio approach’ such as Momentum, Value, and Blue chips, for new members, we recommend that you simply buy the full portfolio when you start. The only consideration would be if we are due to re-balance the portfolio over say the next week, then you could hold off until then. Regarding ASX Momentum specifically, now is a good time to do so, as we have just re-balanced the portfolio on Monday the 16th. Regarding APT, as this stock is actually ranked no.1 in our Momentum portfolio, it has a higher… Read more »

John G.

I do like the AfterPay (APT) business model, but I am worried about bad debts in the current climate. Their customers are not the high income earners. The new fridge bought by an unemployed person, is no security for the loan. (By the time it is repossessed and sold at a giveaway price, half or all the loan value is lost.) Unfortunately, we are not heading for prosperity. I am concerned, that people in desperate need will use APT and bad debt provisions will balloon. How do you view APT’s future and in particular their bad debt risk?
Regards,
John G
NSW

Shannon Rivkin

Hi John,
I think that’s a reasonable concern, but APT has shown good evidence recently that its customers aren’t having problems with APT debts and that the process is being managed well. This could worsen obviously, but APT’s processes look sound so far. Additionally, to some degree, I’m not that concerned as the bad debt cycle won’t be too long and the flipside of this environment is the increased spending online and APT is benefiting greatly from that accelerated shift.

The stock is not cheap however but the future potential remains very exciting.

Regards,
Shannon Rivkin

Fred M.

With the current trade situation between China/ Australia and FMG entry to the momentum strategy, what could happen to the price of FMG if China cuts back on iron ore imports from Australia? Fred M

Shannon Rivkin

Hi Fred,
That is a possibility but a remote one in our view. China relies almost entirely on Australia and Brazil for its iron ore supply (compared to coal which it is almost self-sufficient), and with Brazil’s coronavirus numbers worsening significantly Australia’s iron ore supply is vital if China is going to try to stimulate the economy with infrastructure spending.
Regards,
Shannon Rivkin

Paul K.

I notice the lack of the “next” five in the momentum portfolio?

William O.

Hi Paul,
We are actually close to changing the ASX Momentum strategy to include 10 stocks rather than 5 to bring it in line with the other strategies. We will put out some member communications in the next week or two and then implement the change at the next rebalance date (15 December).
Regards,
William

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