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Deciphering the Normalized Momentum Score (NMS)

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The Normalized Momentum Score (NMS) serves as a technical indicator within stock markets, offering insights into a stock's relative strength based on its recent price performance compared to its peers.

In simple words, the Normalized Momentum Score (NMS) is a measure of whether a stock is headed upwards (bullish) or downwards (bearish).

Core ConceptThe NMS calculates the rate of price change over a designated period, typically 6 to 12 months, while accounting for the stock's volatility. This prevents misinterpreting elevated returns in volatile stocks as indicative of robust momentum.
Normalization ProcessSubsequently, the score undergoes conversion into a percentile concerning all other traded stocks. A score of 100 signifies superior recent performance, while 1 represents the lowest.

Uses of the NMS

Spotting Trending StocksA high NMS implies a stock is surpassing its counterparts, suggesting a potential sustained upward trend. Investors leverage this information to pinpoint potential momentum-driven opportunities.
Portfolio ConstructionCertain mutual funds and indices incorporate NMS to structure portfolios biased toward stocks exhibiting robust recent performance.

Mutual Funds and Indices Leveraging NMS

NIFTY 200 Momentum 30 IndexThis NSE index selects 30 stocks from the NIFTY 200 with the highest NMS, aiming to capture stocks in formidable uptrends.
HDFC Midcap Momentum 150 FundThis  mutual fund directs investments towards mid-cap stocks boasting high NMS, emphasizing potential growth prospects.

Various international funds and indices also integrate NMS or analogous momentum-based strategies.

Key Considerations:

  1. NMS functions as a retrospective indicator and doesn't ensure future performance.
  2. It's imperative to weigh additional factors such as valuation, company fundamentals, and overall market trends before making investment decisions.
  3. Momentum strategies inherently carry volatility and heightened risk, necessitating prudent consideration.