Breakout Alert: 3 month price surge for Chemring

Shares in Chemring (LON:CHG) have led a strong move away from the market average in recent weeks. On a relative price strength basis, the price is up by 11.2% against the market over the past three months. The last close price was 235p.

The move comes after a volatile spell for the UK equities. Markets collapsed in March on concerns about the unfolding Covid-19 crisis. And while index prices have rallied in recent weeks - taking a lead from US markets - there are still grave concerns about the near-term outlook for corporate earnings. 

The upside for Chemring is that investor optimism is translating into positive price momentum, which is regarded as a leading predictor of future performance...

Trading the trend

Research by some of the investment industry's most respected strategists shows that relative strength can be one of the most consistently useful pointers to growth.

Price momentum is heavily influenced by psychology, with investors under-reacting and subsequently over-reacting to company news, driving prices higher over time.

The catch is that investor sentiment is prone to wild swings, which makes momentum risky when used on its own. Combining it with other factors, like attractive valuation, high quality and low volatility, can help reduce that risk.

Overall, the upward trend in the share price of Chemring over the past three months is a promising sign. But while the stock has been outperforming recently, relying on momentum in volatile markets can be hazardous.

What does this mean for potential investors?

Shares in Chemring have outperformed the market over the past three months - but momentum on its own is no guarantee of future returns.

To get a better idea about whether this trend will continue, it's worth doing some investigation yourself. Indeed, we've identified some areas of concern with Chemring that you can find out about here.

Alternatively, if you'd like to find more shares with strong price momentum, you can find them on this Outperforming the Market screen.