Studies by leading experts into the power of price momentum show that stocks with the strongest price trends can potentially keep up the pace for anywhere up to one year. A big part of the reason for this is down to investor psychology.
With that in mind, shares in Ao World (LON:AO) have been in an uptrend in recent months, and the question now for investors is whether that price strength will continue.
Knowing exactly what drives relative strength in share prices can help you find profitable trades based on momentum – but does Ao World fit the bill?
Ao World's performance to date
In terms of relative price strength the stock has performed well against the market over the past year:
- 1 Month: 19.2%
- 6 Months: 228.6%
- 12 Months: 684.2%
Relative strength is a useful 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.
And while there are no certainties about which way a stock will move next, research shows that price trends often persist. Why is this? Studies broadly show it is down to:
- Initial under-reaction by investors- 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.
In both cases, stocks with positive price momentum often see their prices trend higher.
What does this mean for potential investors?
Ao World is currently among the stocks with the strongest six-month and one-year relative price strength in the market. But momentum on its own is no guarantee of future returns.
To get a better idea about whether this momentum will continue, it's worth doing some investigation yourself. Indeed, we've identified some areas of concern with Ao World that you can find out about here.
Alternatively, if you'd like to find more shares with strong price momentum, you can find them on this Positive Momentum screen.
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.