Keeping a regular watch on stocks with positive and negative share price momentum is a useful exercise as it tells us which areas of the market are hot or not.

Investors who follow a pure momentum strategy like to buy stocks that keep a hitting a new 12-month high in the belief the share price is on a roll and can keep going up.

Some investors avoid stocks hitting a new 12-month low, for fear this negative price momentum can be sustained and the share price has further to fall. 

Others may view stocks hitting 12-month lows as a place to seek bargains although a lot of due diligence is required as there is typically a reason why they have been falling.

Simply being on a list of stocks with positive or negative share price momentum doesn’t automatically explain why certain sectors or sub-sectors are hot, but it does give us pointers. Also, counting the number of highs and lows can tell us whether we are near a short-term top or bottom in the market.

If we rewound to April last year, it’s a fair bet that more than half of the stocks in the FTSE All-Share and on AIM would have been making 12-month lows in sympathy with the market and virtually nothing would be making 12-month highs.

As we rolled forward into May 2020, however, the number of stocks making new lows would have started to fall so even without concrete evidence that the worst was behind us we might have started to feel more confident in the rebound.

NEW HIGHS

As it stands today, with the FTSE All-Share just shy of its all-time high, unsurprisingly there are many more highs than lows, spread across a wide range of sectors. Also, that number has been growing over the past week or two so there seems to be no need to worry for now about market direction.

Using a screen of the FTSE All-Share and AIM All-Share compiled by analysts at Shore Capital, the first thing we note is that roughly a third of the nearly 60 stocks which have made 12-month highs in the past week are investment trusts, almost all of which are focused on overseas, alternative or inflation-protection assets rather than plain vanilla UK stocks.

This suggests investors are happy to diversify their holdings away from the UK market, rather than put all their eggs in one basket, and it would seem to point to a relatively high degree of risk appetite, which is noteworthy and is something qualitative to add to our quantitative analysis.

LIMITED UK EXPOSURE

The theme of international diversification carries through to individual stocks, with most benefiting from large foreign exposure. Typical examples are equipment rental firm Ashtead (AHT) and plumbing supplies firm Ferguson (FERG), which generate most of their revenue in North America.

Among the handful of companies with a majority of domestic sales, most are in the consumer discretionary sector, such as toy company Character Group (CCT:AIM), sporting goods and clothing seller Frasers (FRAS), bicycle and auto parts chain Halfords (HFD), sportswear retailer JD Sports Fashion (JD.), car dealership Marshall Motor (MMH:AIM) and cosmetics group Warpaint London (W7L:AIM).

This would seem to tally with enthusiasm for the reopening trade as Covid-related restrictions are eased, although it is notable there are no bar, pub or restaurant stocks on the list, nor are any travel and leisure firms making new highs.

Other sectors that are not making new highs include traditional banks, insurers, oil and gas companies, miners, utilities, telecoms and housebuilders.

FINANCIAL AND LEGAL EAGLES

One area of the market we highlighted some time ago as rich with potential high-fliers was legal services, so it’s gratifying to see shares in DWF (DWF), FRP Advisory (FRP:AIM), Gateley (GTLY:AIM), Keystone Law (KEYS:AIM), Litigation Capital Management (LIT:AIM) and RBG (RBGP:AIM) all making new 12-month highs last week.

Investors have clearly come to appreciate the high returns on capital and the growth runway these firms offer.

Wealth management and investment groups also feature on the 12-month highs, with stocks as varied as Chrysalis Investments (CHRY), Frenkel Topping (FEN:AIM), Georgia Capital (CGEO) and Liontrust Asset Management (LIO) featuring on the list.

As markets hit new highs, it’s reasonable to expect well-run asset managers to benefit from both rising prices and net inflows.

NEW LOWS

With the market almost at its highs, it makes sense that there aren’t many lows to mention. Also, their number hasn’t grown particularly in the past week, rather the list of stocks has varied, although several names have made repeat appearances.

The most common stocks on the list are natural resources companies, mainly in the basic materials and oil and gas sectors, which seems anomalous given the strength of base metals and crude oil in recent weeks. Meanwhile, a trio of non-resource stocks stand out.

TP Group (TPG:AIM) is a software and consulting business which took a hit to margins during the pandemic but looks to have stabilised and is shedding its non-core engineering operations.

Parsley Box (MEAL:AIM) joined the stock market in April this year so technically it isn’t making a 12-month low. The stock listing clearly wasn’t a roaring success, possibly because the Baby Boomer meal delivery story was a bit long in the tooth by the time the company came to market.

Foresight Group (FSG) has also been on the stock market for less than 12 months. It invests in green projects such as waste to energy, wind and solar farms and battery storage, so it is something of a surprise to see it making effective 12-month lows (in reality, an all-time low) in the current environment.

Shares will be publishing the list of stocks hitting 12-months highs and lows on a regular basis going forward.

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