Tesco (LON:TSCO) recently reported a 0.5% increase in Q3 group like-for-like sales - and, after a turbulent period for UK grocers, the question now for investors is whether or not Tesco's share price will finally recover some of the ground it has lost over the past decade.
Finding stocks that can break-out and move higher on news updates is a tactic used by some of the world’s most successful traders. But it’s not a black-box strategy…
Indeed, knowing the factors that drive relative strength in share prices can help you find profitable momentum trades, too. I’m going to use Tesco as an example of how this can work.
How has the Tesco (LON:TSCO) share price performed?
Tesco is a balanced, large cap in the Food Retail & Distribution industry and it has a market cap of £22,427m.
Over the past year, the Tesco share price has risen by 11.4%, which sounds pretty good.
But it’s important to put this in context and look at the market trend. After all, in a rising market where prices are up across the board, that gain might not be as remarkable as it seems.
As it turns out, the FTSE All-Share index is up slightly over the past year, after a tough second half of 2018. So Tesco has actually done better than it seems. Its shares have a 1-year relative strength of 10.3%.
Read on to find out what the evidence shows may happen next...
Why relative strength really matters
Relative strength is a crucial tool in the armoury of technical traders and investors. It’s an instant measure of how a stock has performed in comparison with a benchmark.
Studies by Narasimhan Jegadeesh and Sheridan Titman, who are leading experts on momentum, show that stocks with the strongest price strength tend to keep up the pace for anywhere up to one year.
Why?
It's possible that investor behaviour plays a big role. Academics point to two key drivers:
- Under-reaction - prices are slow to move up because investors are hesitant to bid prices higher in stocks that have already been on a strong run.
- Delayed over-reaction - investors chasing rising prices attract the attention of other investors, who follow them into those trades, pushing prices higher and higher.
Next steps
Tesco has clearly been on a strong run recently. Research into momentum suggests that kind of price trend has the potential to continue. But it’s important to remember that while momentum is a powerful driver of stock market returns, it can be also prone to strong pull-backs when sentiment changes - so care is needed.
Disclaimer: These articles are provided for information purposes only. The content is not intended to be a personal recommendation. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author has no position in the stocks mentioned, unless otherwise stated.