Some add a twist that compares the relative price strength of competing assets. For instance, an investor would look at a 12-month gain of 10 per cent in the S&P 500 next to a 5-per-cent gain in the FTSE 100 over the same period and conclude that the S&P 500 is exhibiting more relative momentum. As a result, a momentum investor would favour the S&P 500 over the FTSE 100.
Wesley Gray, of the advisory firm Alpha Architect, displays a grizzly taxidermy mount in his office to remind him of the hazards of the strategy. He talked about momentum investing – using the $20 example – during awith Cliff Asness, the co-founder of AQR Capital Management, who is also a well-known momentum investor.
Momentum strategies look more at behaviour. Rather than fundamentals driving the price of the stock, it’s the stock price that drives the fundamentals. A soaring stock price attracts more investors, boosts the resources available to the company to invest and acquire and attracts a talented work force. All this would presumably show up in better financial performance, reinforcing the stock gain.