Be aware of these Momentum hazards

Article Excerpt

Nowadays, many investors dream about getting rich by uncovering the ultimate stock-market indicator, or what you might call a “magic key to market profit.” This mythical device not only tells you what stocks to buy, but how to buy them at the bottom and sell them at the top. Momentum investing has been popular for many years, and some studies (see below) suggest it can be superior to other strategies—at least when using historical data and in evaluating it in retrospect. Momentum stocks may move higher as traders buy these widely followed stocks on the latest upswings. But many of these shares are overvalued at today’s prices. When the booms fade, they tend to drop to much lower levels—and often very quickly. There’s nothing wrong with taking a closer look at stocks with momentum. But before you buy, make sure that they also offer reasonable value in terms of their sales, earnings, assets and so on. What is momentum investing? Momentum investing is a strategy…