Momentum has always been a double-edged anomaly that forms the basis for trading strategies - kind of like betting on the fastest horse in the market. Some of the most common strategies are those following stocks that reach all-time highs or 52-week highs. These can be attributed to the need for solid sentiment on underlying fundamentals, catalysts from company deals and news, or even a change in management.
The core concept of following momentum is that stocks performing well in the recent past are highly likely to continue until their trend breaks. While this may be true in most cases, it can also be an unforgiving strategy for those who don’t understand it correctly. Stocks that rise high and fast may potentially fall hard should its catalyst or fundamental drivers change. In my view, combining momentum with other growth or value strategies can help lessen the risk thanks to a cushion provided by company financials and future outlook. This article will look at three stocks that recently made period highs for your consideration.
CBOE Global Markets, Inc. (CBOE)
CBOE Global Markets, Inc. provides financial market participants with investment solutions that cover trading platforms, tradable products, clearing, and infrastructure. It is considered the go-to place for derivatives trading, offering tradable options, including equity and index options. CBOE also provides exchange-traded commodities, international depository receipts, FX, and Futures. The company is in the midst of a share repurchase program that further boosts shareholder value. CBOE Global also announced a $0.55 dividend for the fourth quarter, payable December 15.
Where will the price go now?
CBOE is now trading around its all-time and 52-week high. The strong momentum is supported by volume and is currently in overbought condition according to its 14-day RSI. Price action shows some contraction on the daily chart, which is a potential sign of another move. Traders looking to buy into CBOE can either wait for prices to test its dynamic support (red 20-day SMA line) or wait for it to catch up. Alternatively, traders can buy once prices break out and try the breakout point. Intraday price action can be an excellent way to look at how traders are looking at CBOE’s momentum.
Fair Isaac Corporation (FICO)
Fair Isaac Corporation is an analytics company better known for its FICO scores. Financial institutions widely use it to determine potential risks from their clients. The company’s software provides predictive credit scores that help with the decision-making processes to help mitigate potential risks with their customers. Fair Isaac also offers pre-configured analytic and decision management solutions for specific businesses to help deter fraud and financial crime compliance. The company recently reported its four-quarter results that beat analyst estimates and grew its revenue in its “scores” business by 12% YoY and software business by 11%.
Is the undercut and rally setup a buy signal?
FICO recently hit another all-time high and a 52-week high of $987.02. Price made an “undercut and rally” setup where prices broke below its moving average with a three-candlestick drop starting from Oct. 24 and then rallied, hitting new highs. Its 20 (red line) and 50 (yellow line) day moving average made a crossover signal, indicating a strong momentum. Both volume and RSI support FICO’s bullish move.
TransDigm Group Incorporated (TDG)
TransDigm Group Incorporated is one of the leading aerospace manufacturers supplying aircraft components and systems for military and commercial use. The company offers products that help with aircraft power controls, aircraft cabin structure technologies, and non-aviation-related products like belts and safety restraints in ground transportation applications. TDG recently announced its 4th quarter results, where net sales increased by 23%, income from operations by 56%, and EPS from continuing operations by 82% YoY. The company also expects growth in fiscal 2024 to be positive based on its current momentum.
Is the current price hike sustainable?
Yesterday, TDG gapped up with a significant rise from the near $895.00 area to as high as $990.00, marking an all-time high. The market's enthusiasm came from the company’s upbeat performance and growth prospects. The move is supported by substantial volume and a 14-day RSI in the overbought area. Investors looking to buy into TDG should watch price action between yesterday’s range to determine market optimism. A breakout above the all-time high signifies stronger bullish momentum, and consolidation can give other traders another chance to buy into TDG before another potential move up.
Final Thoughts
Consecutive period highs often indicate how strong a security's momentum is, and how it is likely to continue. Some experts have even coined the adage “buy high, sell higher” due to the momentum effect, where it is believed that past winners will continue to persist due to investors' cognitive biases. Whatever the case, investors should still conduct their due diligence to ensure they have a compelling reason to buy into the stock and not just believe the hype.
On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
