Yes, you are right, infact relative strength can be used to identify momentum stocks. By comparing a stock’s performance against a benchmark like the Nifty smallcap 250 in my case, you can identify which stocks are outperforming. This helps in selecting stocks that are likely to continue their upward trajectory.
Rebalancing is often required in momentum investing to maintain exposure to the strongest performers. Regular rebalancing, such as weekly or monthly, monthly in my case (but monitoring weekly) ensures that you are always invested in stocks showing the highest momentum. However, some investors prefer to hold onto stocks as long as they remain in an ascending phase, or stage 2, which is characterized by a strong uptrend, and infact if you got a fundamentally good stock returns may be more than expected. So this approach can work but may require more active monitoring to ensure timely exits when the trend reverses.
So, both methods have their merits, and the choice depends on your investment strategy, risk tolerance, and how actively you want to manage your portfolio.
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