Momentum investing strategies differ from buy and hold as they seek to take advantage of the market’s consistent enthusiasm for a stock over shorter periods. Often, this enthusiasm is spurred via strong quarterly financial reports, significant announcements, or simply riding on the coattails of the broader market.

2024 could be a boon for momentum investing strategies to shine. This is in contrast to this year, which was dominated by big tech and the Magnificent Seven, which are responsible for disproportionate gains seen in the Nasdaq and S&P 500. If you bought a name like Nvidia (NASDAQ:NVDA) or Microsoft (NASDAQ:MSFT) around the same time ChatGPT hit the market, you followed a momentum-based strategy.

With big tech taking a slight hit, I predict that other sectors in the market will begin to recover and make up for their underperformance this year. An increase in market breadth will give new opportunities for momentum investing strategies to take hold, and there are varying levels of complexity in how to do this.

So here are the best momentum investing strategies investors can use for 2024 and beyond.

Trend Following with Moving Averages

The basis of all momentum investing strategies is its stock price concerning its moving averages. The moving average helps investors identify and follow trends. These moving averages also come in various periods, such as the 20-day SMA through to the 200-day SMA.

Generally, a stock should trade above its long-term moving average to be considered in momentum, such as a 100-day SMA or 200-day SMA, then a short-term one, but it’s even better if a stock trades above both.

“The trend is your friend – until it ends” is a valuable rule of thumb to keep in mind. Generally, if investors, on the whole, are feeling bullish about a stock, then it’s likely that they will continue to push the stock price higher until their enthusiasm is depleted. Once the depletion occurs, it can be a temporary pullback until heading higher again or a more structural reversal to the downside.

In either case, moving averages are fundamental to a momentum-based strategy. Momentum ribbons that consist of multiple moving averages can be found on most charting software, including in popular packages by platforms like Tradingview. This software can also confirm the trend by combining it with other momentum indicators like the Moving Average Converge-Divergence or the Relative Strength Index.

Sector Rotation Based on Economic Cycles

Confirming the trend using moving averages is a crucial step, and they are often required when using stock screeners to apply this strategy. However, a substantial weakness of relying on moving averages is that they use historical data; there is nothing inherently predictive about them besides the observation that stocks in an uptrend tend to keep going up.

This is where some more forward-looking and macro elements come into play by allocating investments between sectors of the economy that are expected to outperform during different phases of the economic cycle.

For example, interest rates are predicted to fall next year, which could have some positive implications for real estate stocks. Falling interest rates also reduce the risk-free rate of bonds, so dividend stocks may also become more attractive as investors become hungry for yield, as well as easing pressure off more speculative investments like tech stocks and cryptocurrencies.

By combining moving averages with strategic allocation, investors can pair the stock’s price movements with a broad understanding of what is causing the stock’s price to move, which is essential.

Company-Specific Momentum Factors

The final part of solid momentum investing strategies pairs price movements and favorable macro backdrops with strong company fundamentals and a key catalyst. These are two critical components. If a company’s financial health is poor or there’s a lack of solid reasons for bulls to be enthusiastic besides what the broader market is doing, that momentum will likely end very quickly. There’s also the possibility it’s a dubious investment overall if investors are trading from a place of fear of missing out.

Ideally, a company should have consistent earnings and revenue growth and upward surprises for its top and bottom lines. The business should also have a strong balance sheet and have issued positive guidance in the short term.

The catalyst can take many forms, ranging from innovations, development pipelines, acquisitions, rumors of potential acquisitions, enhancing competitive advantages, etc. The point is that there must be at least some rational basis for bulls to continue to push the stock price higher and, thus, the momentum going. If this component is missing or is already fully priced in, then it’s likely that there will be no further momentum to be had.

The benefit of doing this due diligence is discovering whether such a rally makes sense in a macro and company-specific framework, forcing investors to put their emotions aside and think through their thesis.

Understanding the correlation between the stock and broader indices like the Nasdaq or the S&P 500 is also critical. A rising tide lifts all boats, but a falling tide grounds all vessels. It’s easy to make money using a momentum strategy when the indices are surging higher, but in a flattening market or a declining one, the strategy may fall apart completely. You must then be accurate in your prediction of what the stock is likely to do, as well as what the industry and the market are likely to do, which reveals its complexity in full.

Combining a stock’s technicals and price movements with its fundamentals and competitive position within the macro drop backdrop can make for a high-probability momentum strategy that can pay off for discerning investors.

On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.