Exploring Momentum Trading and the Rise of Tech Stocks in the First Half of 2023

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The first half of 2023 showcased positive market momentum in the U.S. stock market, with major indexes reaching new highs despite various concerns. The market remained resilient despite worries about the Federal Reserve, bank failures, and geopolitical tensions. The S&P 500 had its best first half since 2019, rising 16% and reaching a 52-week high.

Momentum trading has become a prominent strategy that many market participants employ, taking advantage of this condition. So, What is momentum trading? This article goes in-depth discussing momentum trading and technology stocks.

Tech stocks are leading the market momentum.

Tech stocks have had a strong 2023 performance so far. Traders have been flocking to the high-momentum sector, driving shares of technology companies to impressive highs. The Nasdaq Composite index, which consists of prominent tech giants, experienced an impressive gain of 33% in the first half, marking one of its strongest performances on record.

Apple reached new all-time highs and surpassed the remarkable $3 trillion market capitalization milestone. This achievement reflects the market’s enthusiasm surrounding Apple’s new Vision headset.

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AI software relies on robust computing power, driving the development of AI chips for data centers, self-driving cars, robotics, smartphones, and other devices. Companies like Nvidia, the leading AI chipmaker, have experienced significant stock growth. Advanced Micro Devices (AMD) has also introduced chips optimized for generative AI, powering technologies like ChatGPT.

Tech giants like Microsoft, Amazon, and Alphabet’s Google have embraced AI and are leveraging their resources to offer AI analytical services to business customers. Microsoft, for example, has invested in OpenAI. Software companies like Salesforce, Adobe, and Atlassian are incorporating AI capabilities into their platforms, offering features that utilize generative AI models.

Venture capital is flowing into AI startups, with investors anticipating a wave of AI-based IPOs in the coming years. Startups like Anthropic, Character.AI, and Adept have secured significant funding to advance their AI technologies. The AI chip market is also witnessing the rise of startups such as Cerebras, Sambanova, and Graphcore, posing competition to established players like Nvidia.

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Momentum Trading

Ever heard the phrase If you won’t catch the wave, then you will never ride it? Well, that will give you a rough idea of how momentum trading works. Momentum trading is a strategy that capitalizes on the rate of acceleration of a security’s price, known as market momentum.

It involves buying a security when its price is rising and selling after it has peaked. This approach follows the principle of “buy high, sell higher” and aims to profit from short-term price movements rather than fundamental value.

Market momentum can be measured using various technical indicators and tools. One commonly used indicator is the moving average (M.A.), which calculates the average price of a security over a specified period. Higher moving average trend lines indicate positive momentum, while descending trend lines signal negative momentum. The moving average convergence divergence (MACD) is another indicator derived from exponential moving averages that helps identify momentum trends.

The volume-weighted average price (VWAP) is a popular momentum indicator that assesses the trend of a security’s price in relation to its trading volume. Significant increases in VWAP can indicate a strong bullish signal, while significant decreases can suggest a strong bearish signal.

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The positive and negative volume indexes (PVI and NVI) are tools designed to indicate how volume influences price. They track changes in volume and calculate the impact on the price. PVI and NVI help identify the relationship between volume and momentum.

The relative strength index (RSI) is a widely used momentum indicator that evaluates the speed and magnitude of price changes over a specific timeframe. RSI shows the strength of momentum.

Conclusion

The first half of 2023 saw a surge in market momentum in the U.S. stock market, led by the strong performance of technology stocks. Momentum trading became popular, capitalizing on price acceleration and employing various indicators to detect market momentum. The market’s resilience and the positive performance of the S&P 500 and Nasdaq Composite index reflected the optimism and opportunities present in the market during this period.

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