Analyzing three current momentum plays: Amazon, Walmart, and Progressive

While many firms have suffered greatly during COVID-19, there are some that Mr. Market thinks are emerging unscathed and even look better than before. This is an interesting time to be betting on momentum, not least because most of the market is just recovering from major declines. In this post, I analyze three possible momentum bets in current conditions: Amazon (AMZN), Walmart (WMT), and Progressive (PGR).

There are many different ways to analyze momentum and I favor two. One of these, looking at price vs. the 10-month moving average (MA), is well known. A stock or index has positive momentum when it moves through and above the 10-month MA and vice versa. The other approach, one that I have developed, uses Fourier analysis to decompose price variability into different time scales. I describe the background for this approach here. Fourier analysis is a widely-used technique for analyzing time series of all kinds. In this application, the method is being used to separate persistent features of price variability from noise, the short-term random part. Both Fourier and MA are attempts to separate persistent signal from noise. There are all kinds of problems with using trend models as a mechanical timing tool and I am not advocating mindless rules. The world is too complex for that. These models can, however, highlight situations that are worthy of a deeper look. In that spirit, let’s look at three stocks that look favorable in terms of being above their 10-month MA and showing attractive trends from the Fourier analysis.

The three charts below show the five-year price histories for Amazon, Walmart, and Progressive, along with the trailing 10-month MA and the Fourier model value (the estimated persistent signal in price).

Trend analysis of Walmart (WMT) through April 24

Walmart (WMT) had limited declines as COVID-19 hit and has recovered to make new highs. The price is well above the 10-month MA and the Fourier model suggests that the trajectory for recent steep gains will persist for a while.

Trend analysis for Amazon (AMZN) through April 24

Amazon (AMZN) is well above its 10-month MA and the Fourier trend shows a steep positive trend. The only negative for Amazon is that the price is already well above the Fourier trend, suggesting that current prices are greater than the ‘fair’ value suggested by the Fourier model.

Trend analysis for Progressive (PGR) through April 24

A less-obvious momentum bet for current conditions is Progressive (PGR). While the stock took a brief swoon, it has recovered to move above the 10-month MA. In addition, the Fourier model suggests the resumption of a positive trend in price appreciation starting in the latter half of 2019.

I do not believe in mechanically following momentum indicators. That said, companies that have maintained or even increased their stock prices through the COVID-driven decline are worth having a look at. I have selected these three for consideration because the Fourier trends indicate accelerating gains and because the Fourier trends for these stocks are statistically robust (a discussion of how this is calculated is beyond the scope of this article). All three are also above their 10-month moving averages. Of the three, Amazon is the one gives me the greatest pause because the price is so high relative to the trends.