DEFINITION of 'Market Momentum'

Market momentum is a measure of overall market sentiment that can support buying and selling with and against market trends. There are several market factors and indicators that can help an investor to follow market momentum.

BREAKING DOWN 'Market Momentum'

Market momentum can be a good indicator for bullish and bearish trends. Positive momentum can indicate a potential bullish trend while negative momentum can indicate a bearish trend. Generally, market momentum can be defined from the following equation:

M = V - Vx

Where V is the latest price, and Vx is the closing price x number of days ago. This equation can lead to the drawing of a trendline with varying periods used in the calculation.

Broadly, momentum can be measured across both asset classes and individual securities. There are several factors that can lead to market momentum.

In equities, broad market increases in corporate profits can help to create positive price momentum. In fixed income, falling interest rates can be a catalyst for price momentum.

In individual securities, market momentum for a particular stock can be driven by several factors. Positive momentum can be the result of increasing revenue, earnings or sales. Positive momentum can also be influenced by a reduction in a company’s debt obligations and an increase in its projected cash flow.

Market Momentum Indicators

Investors and technical chartists can follow several market indicators to gauge market momentum.

Market Momentum Indexes

Market momentum indexes provide momentum indicators for various market sectors. MSCI and FTSE Russell are two companies that have introduced momentum indexes.

The MSCI momentum indexes are part of the company’s factor index series. Momentum indexes include the MSCI USA Momentum Index and the MSCI World ex USA Momentum Index. The Indexes base their methodology on a momentum score.

FTSE Russell also manages the Russell 1000 Momentum Focused Factor Index which was introduced in 2015. With the launch of this index State Street Global Advisors also launched the SPDR Russell 1000 Momentum Focus ETF (ONEO) which is a passive ETF that tracks the Index.

Security Price Momentum Indicators

In technical analysis, momentum can be a very profitable indicator to follow for trading signals on individual securities. Below are some of the popular momentum indicators technical analysts follow.

Moving average: A stock’s moving average price is one of the simplest ways to follow its momentum. The moving average is an average of its price over a specified period of time. Higher moving average trendlines signal positive momentum while descending moving average trendlines signal negative momentum.

Volume weighted average price (VWAP): The VWAP is calculated from the following:

VWAP = (Total Shares Bought x Share Price) / Total Shares Bought

VWAP allows a trader to follow how a price is trending in relation to its volume. Significant increases in the VWAP can be a strong bullish signal while significant decreases can be a strong bearish signal. (See also: Why is the Volume Weighted Average Price (VWAP) important for traders and analysts?)

Positive and Negative Volume Indexes (PVI and NVI): The Positive and Negative Volume Indexes were developed to provide an indicator for how volume is affecting price. They are calculated from the following:

PVI = Previous PVI + {[(Today's Closing Price-Yesterday's Closing Price)/Yesterday's Closing Price)] x Previous PVI}. If current volume is lower than the previous day's volume, PVI is unchanged.

NVI = Previous NVI + {[(Today's Closing Price-Yesterday's Closing Price)/Yesterday's Closing Price)] x Previous NVI}. If current volume is higher than the previous day's volume, NVI is unchanged.

Moving Average Convergence Divergence (MACD): The MACD is calculated using an exponential moving average.

Relative Strength Index (RSI): The Relative Strength Index is calculated using the following formula:

RSI = 100 - 100 / (1 + RS)

RS = Average up period gains throughout a specified timeframe / Average loss from down periods over a specified timeframe

RSI is intended to provide a momentum indicator through evaluation of how a price is changing in relation to the speed and amount of change occurring over a specified timeframe.

See also: Momentum and the Relative Strength Index and What technical tools can I use to measure momentum?

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