What is momentum in the stock markets?
Close your eyes and think of the word “momentum.” What are the visuals that come to mind? A train passing through a station? Horses galloping on a race course? A Cheetah running after a deer in an Animal Planet documentary? An aeroplane taking off on a runway? Usain Bolt? All of these ideas are visuals of fast movement. Hence, we can say that momentum signifies forward movement. Anything that has momentum can be expected to carry on forward or upward; can be expected to move ahead.
Similarly, for the stock markets, momentum signifies a company’s stock price going up from where it currently is. When a lot of companies have such momentum, the broader stock markets are also said to have momentum.
For the stock markets, momentum can be positive or negative. The market can move in either direction with speed. Positive momentum depicts bull markets, whereas the markets would have negative momentum in bear phases.
What are the factors that influence market momentum?
Both positive and negative momentum can have different influencing factors. Things like strong quarterly numbers by listed companies, business-positive government policies, booming economy, higher consumer spending, etc are factors that influence positive momentum in the markets.
On the other hand, a change in government, unfavourable monsoon, global economies faring poorly, higher unemployment, etc are factors that can lead to negative momentum in the stock markets.
How is momentum calculated for the stock markets?
In India, one of the ways to calculate momentum is by using the exponential moving averages of Nifty. Momentum is the difference between the 90-day and 30-day exponential moving averages of Nifty, divided by the 90-day moving average.
A positive value indicates positive momentum. And vice versa.
What are exponential moving averages?
A weighted moving average is a calculation that weights recent price data to measure the price momentum of a stock. Exponential moving averages are a type of weighted moving average that gives higher importance to recent price data.
For the purpose of calculating momentum, the recent changes in the price of a stock are very important. Hence, exponential moving averages are used.
How does momentum affect MMI?
A positive exponential moving average indicates positive momentum. This shows that the market is in an uptrend, and hence the Market Mood Index will move towards the greed zones.
Conversely, a negative exponential moving average, which is a sign of negative momentum in the markets, will take MMI into the fear zones.