Category: Asset Selection (Screening / Ranking) & Trend Tracking

Introduction to Composite Momentum

Definition

Composite Momentum is a scoring method that measures an asset's performance over several simultaneous periods.

Instead of just looking at whether a stock went up yesterday or last month (which can be noise), we look at its "health" over the short, medium, and long term at the same time.

• The Goal: Identify assets that have a robust and sustainable upward trend, and filter out those that are only ephemeral movements.

The Two Popular Variants

• Momentum 1-3-6 (The "Tactical"): It is more reactive. Ideal for capturing early-cycle trends or for more dynamic portfolios.
• Momentum 3-6-12 (The "Strategic"): It is more stable. It completely smooths out short-term noise to focus on heavy and deep trends.

The Formula

The indicator is a simple arithmetic average of past performances (ROC - Rate of Change).

For Momentum 1-3-6:

For Momentum 3-6-12:

Example: If a stock has gained +2% this month, +10% over 3 months, and +24% over 6 months, its Momentum 1-3-6 score is 12%.

Composite Momentum in Practice

What is it used for? (The Ranking)

This indicator is not really used to identify "overbought" or "oversold" conditions. It is used for comparison.

Imagine you are hesitating between Apple stock and Tesla stock. You calculate the 1-3-6 score for both. The one with the higher score is the one with the better overall dynamic (the best inertia).

How to Interpret it?

• Positive Score: The average trend is bullish.
• Negative Score: The average trend is bearish (to be avoided).
• Increasing Score: The asset is accelerating (momentum is strengthening).

Use Case: Sector Rotation

This is the favorite weapon of portfolio managers.

1. Take the 10 or 11 major sectors of the economy (Tech, Healthcare, Energy, etc.).
2. Calculate the Momentum 3-6-12 for each sector.
3. Invest only in the top 3 sectors in the ranking.

Why? Because money goes where growth is strongest and most stable.

Attention to Peculiarities

It is not a "Timing" Tool

If the score is high, it means the stock has already gone up a lot. Do not use this indicator to try to buy "at the lowest point." You are buying an already confirmed trend ("Buy high, sell higher").

The Risk of Brutal Reversal (Momentum Crash)

Assets with strong Momentum 1-3-6 are often those everyone loves. If bad news hits, the fall can be more brutal than for other stocks, because everyone exits at the same time.

The Difference with the "Moving Average"

The Moving Average tells you if the price is above its average. The Composite Momentum tells you how fast it is moving away from its starting point. It is a measure of velocity, not just position.

Going Further (Advanced Level)

Weighting (Weighted Momentum)

Some experts prefer to give more weight to the most recent months to increase reactivity.

• Alternative Formula:

The Safety Filter

To avoid buying an asset that has strong 12-month momentum but just crashed last week, a simple condition is often added:

• Rule: Buy if Composite Momentum $>$ 0 AND Current Price $>$ 200-day Moving Average.

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Updated on: 02/03/2026