There’s something strange going on with so-called momentum stocks.

Momentum stocks are thought of as the market’s best performers, but for the early part of 2019, they were anything but. As the Dow Jones U.S. index soared 18% from January through April this year, a momentum strategy that buys the market’s best performers over the past 12 months and sells the worst declined 3%.

The market has gotten hit in May, however, and momentum stocks are suddenly outperforming: The momentum strategy has gained 2.4%, while the broader benchmark fell 2.4%.

Why the market has declined is no secret. Concerns about the strength of the U.S. economy grew—the latest ISM Manufacturing index fell to 52.8, its lowest since October 2016—and trade tensions between the U.S. and China reignited, with tariffs on $200 billion Chinese goods elevated from 10% to 25%.

The environment shouldn’t be ideal for momentum stocks, which have been positively correlated with the market since the start of 2017, meaning they tend to move up when the market rises and down when market falls.

In recent months, however, the correlation has turned sharply negative, noted Bernstein quantitative strategist Sarah McCarthy. That’s because what the basket of momentum stocks today is very different from what it was a year ago, McCarthy notes. The group used to be heavily loaded with tech names, now it has a much more balanced sector exposure.

During its latest rebalance, the Invesco S&P 500 Momentum ETF (SPMO) halved its exposure to the tech sector from 36.6% to 17.2%, and more than doubled the weight in health care to 27.9%. Utilities and real estate went from nearly zero to 11.7% and 7.1% of the portfolios, respectively. That helps explain the fund’s moderate loss of 1.7% in May, even though the tech stocks within the S&P 500 slumped a much steeper 5.7%.

Retail investors, however, might not have noticed momentum’s underperformance earlier this year at all. The Invesco Momentum ETF gained more than 17% during the first four months of the year, almost exactly the same as the S&P 500.

Why the difference? Part of the reason is that the Invesco Momentum ETF is a long-only portfolio—it has no short bets that can go against it. The rest of the difference can be attributed to the timing and frequency of its rebalances: The Invesco Momentum ETF rebalanced only twice a year in March and last September, while the earlier-mentioned long-short strategy does it quarterly, the latest ones in February and last November.

Momentum’s higher exposure to defensive sectors has made the momentum basket move more in tandem with bonds and in the opposite direction of cyclical sectors such as financials, materials, industrials, and consumer discretionary, according to Maxwell Grinacoff of Macro Risk Advisors.

This might finally make momentum stocks attractive again amid the elevated level of uncertainty in the market today. Things have improved a lot for the factor since late last year, according to Bernstein’s McCarthy. Thanks to the more diversified sector composition, correlation among high-momentum stocks has fallen sharply, which means they are less likely to crash together in case of volatility.

“Peaks in levels of correlation or co-movement among high-momentum stocks [have] been a reliable indicator historically of future underperformance of the factor,” she wrote in the research, “This sharp reduction in the comovement of high-momentum stocks removes much of the vulnerability of the factor.”

Analysts usually upgrade their earnings estimates for high-momentum stocks more than low-momentum stocks, creating an overly bullish sentiment among investors that could often make the high-momentum stocks very crowded. That behavior has moderated over recent months, noted McCarthy, and the momentum strategy has become less crowded since the fourth quarter last year, though still above historical levels.

Yes, the factor remains quite expensive compared to historical levels. The valuation spread between the high-momentum and low-momentum stocks has been rising since early 2017 and now sits at the widest level in at least 15 years.

It’s a winner’s market, after all.

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