The equity markets witnessed a downtrend over the past couple of days as concerns related to the health of the overall U.S. economy remained an overhang on investor sentiments. Preliminary data from the University of Michigan’s consumer sentiment index for May 2023 fell to a six-month low of 57.7 compared to broad-based expectations of a reading of 63.0. Despite improving job market conditions, investors remained worried about a probable recession later this year. Uncertainty over an amicable solution to the debt ceiling crisis further compounded the market gloom.
A weaker-than-expected wholesale prices data – often considered a sign of easing inflation – further failed to ease the concerns of a downturn. Wholesale prices rose just 0.2% in April compared with wide expectations of a 0.3% rise. The consumer price index increased 0.4% in April, equating to a 4.9% annual inflation rate – the lowest reading since April 2021. However, lingering financial market stress and uncertain business conditions failed to cheer the markets.
With uncertainty becoming the norm of the day, investors often seek to employ time-tested winning strategies to fetch sustained profits. One of the most successful game plans to beat the blues is to bet on momentum stocks when value or growth investing fails to generate the desired profits.
This approach primarily tends to follow the adage, “the trend is your friend.” At its core, momentum investing is “buying high and selling higher.” It is based on the idea that once a stock establishes a trend, it is more likely to continue in that direction because of the momentum that is already behind it. But before we delve deep into it, let us try to fathom why does the momentum strategy at all work?
There are several behavioral biases that most investors exhibit in their decision-making. And these emotional responses, or rather mistakes, are the very reason that makes the momentum strategy work.
For example, some investors 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 errors in judgment.
Furthermore, investors initially tend to underreact to news, events or data releases. However, once things become clear, they have a habit of going with the flow and overreacting, causing dramatic price reactions. These behavioral problems extend trends, thus opening up huge opportunities for momentum players.
To sum up, momentum investing is a way to profit from the general human tendency to extrapolate current trends into the future. It is based on that gap in time before the mean reversion occurs, i.e., before prices become rational again.
In this context, stocks like Inter Parfums, Inc. IPAR, Rockwell Automation, Inc. ROK and MicroStrategy Incorporated MSTR are worth betting on.
Momentum strategies have been known to be alpha-generative over a long period and across market stages. So, this strategy is quite tricky to implement, as detecting these trends is no child’s play.
Here, we have created a strategy to help investors get in on these fast movers and rake in handsome gains. Our screen will help you benefit from both long-term price momentum and a short-term pullback in price.
Percentage Change in Price (52 Weeks) = Top #50: This 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: Stocks sporting a Zacks Rank #1 (Strong Buy) have a proven history of outperformance irrespective of the market conditions. You can see the complete list of today’s Zacks #1 Rank stocks here.
Momentum Style Score of B or Better: A top Momentum Style Score knocks out a lot of the screening process as it takes into account several factors that include volume change and performance relative to its peers. It indicates when the timing is best to grab a stock and take advantage of its momentum with the highest probability of success. 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 stocks must all be trading at a minimum of $5.
Market Capitalization = Top #3000: We have chosen stocks that are among the top 3000 in terms of market value to ensure the 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 six stocks that made it through this screen:
Headquartered in New York, Inter Parfums is engaged in the manufacturing, distribution and marketing of a wide range of fragrances and related products. The company sells its products mainly through department stores, specialty stores, perfumeries, domestic and international wholesalers and distributors. Inter Parfum’s products are also sold through various Internet platforms. The stock has gained 91.3% in the past year but declined 10.3% in the past week. It has a Momentum Score of B.
Based in Milwaukee, WI, Rockwell provides industrial automation and information solutions worldwide. The company has a wide network spanning more than 100 countries. The company operates manufacturing facilities in the United States and multiple other countries. Rockwell’s stock has appreciated 34.3% in the past year but declined 4.1% in the past week. It has a Momentum Score of B.
Headquartered in Tysons Corner, VA, MicroStrategy provides enterprise analytics software and services in the United States, Canada, Europe, the Middle East, Africa and internationally. It is reportedly the largest independent publicly-traded analytics and business intelligence firm. The stock has rallied 34.5% in the past year but declined 17.1% in the past week. MicroStrategy has a Momentum Score of A.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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