The market has been on fire this year with the S&P up 23.3%, the Dow rallying 18.7%, and the Nasdaq gaining 27.9% year to date. But this should not be a surprise to investors as the U.S. economy is strong and the job market is at its best in nearly five decades.
However, tariffs are emerging as the main stumbling block in efforts by Washington and Beijing to come to a limited trade deal, a month after the world’s two ‘powerhouse’ economies called for a truce in their ‘lingering’ trade war. That’s a whole another story and the developments will be closely monitored.
As a general rule in investing, reacting emotionally to volatile trends can cause more damage to a portfolio’s return than the downturn itself. That said, when value or growth investing fails to fetch sustained profits, one should explore another time-tested winning strategy that simply bets on the frontrunner stocks. This is known as momentum investing.
At the core, momentum investing is buying high, selling higher. It is based on the idea that once a stock establishes a trend, it is likely to continue in that direction. There’s a whole list of behavioral biases that most investors exhibit. For instance, there are investors who are anxious about booking losses and hence, hold on to losing stocks for too long, hopeful of a rebound in prices.
On the other hand, a few investors sell their winners way too early. Momentum investing is one of the best strategies to avoid making such mistakes. So, basically, it’s a way to profit from the general human tendency to extrapolate current trends into the future. Momentum investing is, thus, based on that gap in time which exists before the mean reversion occurs i.e. before prices become rational again.
Momentum strategies have been known to be alpha-generative over a long period of time and across market stages. So obviously, this strategy is quite tricky to be implemented as detecting these trends well ahead of time is no child’s play.
Here, we have created a strategy that will help investors get in on these fast movers when there is a short-term pullback in price, and rake in handsome gains.
Percentage Change in Price (52 Weeks) = Top #50: This item selects the top 50 stocks with the best percentage price change over the last 52 weeks. This parameter ensures we get the best stocks that have appreciated steadily over the past year.
Percentage Change in Price (1 Week) = Bottom #10: From the above 50 stocks, we then choose those that are also among the 10 worst performers over a short one-week period. This parameter picks the ones that have witnessed a short-term pullback in price.
Zacks Rank #1: No matter whether it is a good market or bad, stocks sporting a Zacks Rank #1 (Strong Buy) have a proven history of outperformance.
Momentum Style Score of B or better: While ensuring solid momentum features, a Momentum Score of A or B knocks out a lot of the screening process, as it takes into account several factors including volume change and relative performance. Stocks with a Momentum Score of A or B, when combined with a Zacks Rank #1 or 2 (Buy), handily outperform other stocks.
Current Price greater than $5: The prices of the stocks should not be too low.
Market Capitalization = Top #3000: We have chosen stocks that are among the top 3000 in terms of market value to ensure stability of price.
Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that these stocks are easily tradable.
Here are three of the four stocks that made it through this screen:
Insight Enterprises, Inc. NSIT provides information technology hardware, software, and services solutions in the United States, Canada, Europe, the Middle East, Africa, and the Asia-Pacific. The stock has gained more than 38% in the past year but declined 4.2% over the past week. It has a Momentum Score of A.
YETI Holdings, Inc. YETI designs and distributes products for the outdoor and recreation market under the YETI brand in the United States, Canada, Australia, and Japan. The stock has jumped almost 80% in the past year and has a Momentum Score of A. Shares of the company have decreased 4.7% over the past week.
Universal Forest Products, Inc. UFPI, through its subsidiaries, manufactures and markets wood and wood-alternative products in North America, Europe, Asia, and Australia. The stock has added more than 78% in the past year but fell 3.7% over the past week. It has a Momentum Score of B.