Momentum factors are typically derived from changes in price time series by identifying trends and patterns. They can be constructed based on absolute or relative return, by comparing a cross-section of assets or analyzing an asset's time series, within or across traditional asset classes, and at different time horizons.
A few popular illustrative indicators are listed in the following table:
Factor |
Description |
Relative Strength Indicator (RSI) |
The RSI compares recent price changes across stocks to identify stocks as overbought or oversold. A high RSI (example, above 70) indicates overbought, and a low RSI (example below 30) indicates oversold. It uses the average price change for a given number of prior trading days with positive price changes and negative prices changes to compute: |
Price momentum |
This factor computes the total return for a given number of prior trading days. In the academic literature, it is common to use the last 12 months but exclude the most recent month because of a short-term reversal effect frequently observed in most recent price movements, but shorter periods have also been widely used. |
12-month price momentum Vol Adj |
The 12-month price momentum adjusted for volatility factor normalizes the total return over the previous 12 months by dividing it by the standard deviation of these returns. |
Price acceleration |
Price acceleration calculates the gradient of the trend (adjusted for volatility) using a linear regression on daily prices for a longer and a shorter period, e.g., a one year and three months of trading days and compares the change in the slope as a measure of price acceleration. |
Percent Off 52 week high |
This factor uses the percent difference between the most recent and the highest price for the last 52 weeks. |
Additional sentiment indicators include the following:
Factor |
Description |
Earnings estimates count |
This metric ranks stocks by the number of consensus estimates as a proxy for analyst coverage and information uncertainty. A higher value is more desirable. |
N month change in recommendation |
This factor ranks stocks by the change in consensus recommendation over the prior N month, where improvements are desirable (regardless of whether they have moved from strong sell to sell or buy to strong buy and so on). |
12-month change in shares outstanding |
This factor measures the change in a company's split-adjusted share count over the last 12 months, where a negative change implies share buybacks and is desirable because it signals that management views the stock as cheap relative to its intrinsic and, hence, future value. |
6-month change in target price |
The metric tracks the 6-month change in mean analyst target price and a higher positive change is naturally more desirable. |
Net earnings revisions |
This factor expresses the difference between upward and downward revisions to earnings estimates as a percentage of the total number of revisions. |
Short interest to shares outstanding |
This measure is the percentage of shares outstanding currently being sold short, that is, sold by an investor who has borrowed the share and needs to repurchase it at a later day while speculating that its price will fall. Hence, a high level of short interest indicates negative sentiment and is expected to signal poor performance going forward. |