Understanding Momentum, Volume, and Relative Strength: Key Insights for Investors

Navigating the complexities of retirement planning and investment strategy requires a nuanced understanding of market dynamics. In the latest episode of the Retirement Fiduciary Podcast, Adam Koós, president of Libertas Wealth Management, explores three essential components of market analysis: momentum, volume, and relative strength.
These concepts provide investors with the tools to evaluate market trends and identify opportunities, whether they are preparing for retirement or optimizing their existing portfolios.

Momentum: The Market’s Underlying Energy

Momentum reflects the strength of a market trend and plays a crucial role in assessing an investment’s performance. Indicators such as the Relative Strength Index (RSI) are widely used to determine whether an asset is experiencing bullish or bearish momentum. When the RSI rises above 70, it suggests a bullish phase marked by strong upward movement. Conversely, an RSI reading below 30 signals bearish momentum, often indicating potential downward trends. Another critical aspect of momentum analysis is identifying divergences—situations where prices continue to rise, but indicators like RSI start to fall.

• RSI Above 70: Indicates bullish momentum, suggesting strong upward movement.
• RSI Below 30: Signals bearish momentum, reflecting potential downward trends.
• Divergences in Momentum: When prices rise but momentum indicators like RSI fall, it can signal underlying market weaknesses.

These divergences often signal hidden market vulnerabilities. For instance, the S&P 500 recently hit all-time highs, but the presence of negative momentum divergences suggests caution, highlighting the importance of understanding these dynamics to anticipate potential market shifts.

Volume: A Gauge of Market Conviction

Volume, which measures the amount of trading activity, offers valuable insights into the conviction behind market movements. High trading volume during significant price changes often indicates strong market consensus, whether bullish or bearish. In contrast, low trading volume suggests hesitation or uncertainty among investors.

• High Volume with Price Changes: Suggests strong market conviction, whether bullish or bearish.
• Low Volume: This may indicate hesitation or uncertainty among investors.

Recent market behavior has seen muted volume across major indices, reflecting a “wait-and-see” sentiment as investors await key decisions from the Federal Reserve and assess the potential effects of political transitions. Understanding these patterns helps investors gauge the strength and sustainability of market trends.

Relative Strength: Finding Market Leaders

Relative strength (RS) evaluates how a stock or sector performs compared to others, making it a critical tool for identifying market leaders. Investments with RS ratings above 60 typically outperform their peers and have the potential for continued growth. Adam highlights the importance of focusing on “playoff teams”—those assets demonstrating strong relative strength.

• RS Ratings Above 60: Indicate strong performance and potential for continued growth.
• Focus on Playoff Teams: Investing in assets with high relative strength ensures alignment with market leaders.

Sectors like financials and consumer discretionary currently show robust relative strength, whereas defensive sectors such as healthcare are underperforming. Aligning portfolios with top-performing sectors ensures that investments are positioned to capitalize on market trends.

Key Takeaways for Investors

Analyzing momentum, volume, and relative strength together provides a well-rounded view of market conditions. Integrating these indicators enables investors to understand market trends with greater clarity and precision. Rather than chasing underperforming assets that may appear to be bargains, Adam recommends focusing on high-performing investments aligned with strong market trends. Simplification is also key—using a few effective indicators can guide decision-making without overwhelming the analysis process.

• Integrate Indicators for Context: Analyzing momentum, volume, and relative strength together provides a more comprehensive understanding of market trends.
• Avoid Chasing Weakness: Focus investments on high-performing assets rather than seeking perceived bargains in underperforming areas.
• Simplify Your Approach: Use a few effective indicators to guide decisions rather than overload analyses with unnecessary complexity.

Conclusion: Building a Stronger Investment Framework

Adam Koós emphasizes the importance of a disciplined, evidence-based approach to investing. By mastering the concepts of momentum, volume, and relative strength, investors can better align their portfolios with market leaders and navigate the uncertainties of retirement planning.
For those seeking personalized guidance or a second opinion on their investment strategy, Libertas Wealth offers the expertise to help build a secure financial future. A well-planned strategy is essential for navigating the path to a secure retirement.