Yahoo Finance 3 Momentum Anomaly Picks as Inflation Fears Refuse to Abate
After witnessing one of the longest winning streaks since the beginning of 2024, the broader U.S. equity markets recorded a downward trajectory yesterday as the minutes of the Federal Reserve’s May policy meeting reignited fears that the central bank might not cut interest rates in the near future. The minutes revealed that several Fed officials are of the view that although inflation has eased over the past year, it is yet to achieve the benchmark 2% level. Consequently, there is an increasing willingness to resort to stricter policy measures if inflation fails to move toward the coveted goal.
Earlier, the markets were buoyed by Fed Chairman Jerome Powell's comments, which largely ruled out a central bank hike in its next policy meeting after holding the rates steady between 5.25% and 5.50% in May. This had fueled optimism regarding a probable interest rate cut, with investors even pricing in a second rate cut by the end of the year with a nearly 50% likelihood of a 25-basis point rate cut in September.
However, given the shift in the Fed's stance, it has become tough to gauge the rate hike trajectory, forcing investors to wait for further clarity from other officials in the future.
Amid the uncertainty, 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, make 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 Southern Copper Corporation SCCO, M/I Homes, Inc. MHO and MakeMyTrip Limited MMYT 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.
Screening Parameters
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 stocks out of the six that made it through this screen:
Phoenix, AZ-based Southern Copper engages in mining, exploring, smelting and refining copper and other minerals. The company conducts exploration activities in Argentina, Chile, Ecuador, Mexico and Peru. Southern Copper has the largest copper reserves in the industry and operates high-quality, world-class assets in investment-grade countries such as Mexico and Peru. The stock has gained 81.3% in the past year but declined 5.1% in the past week. Southern Copper has a Momentum Score of B.
Based in Columbus, OH, M/I Homes engages in the construction and sale of single-family residential homes in Ohio, Indiana, Illinois, Minnesota, Michigan, Florida, Texas, North Carolina and Tennessee. It is one of the leading homebuilders of single-family homes in the country. The stock has gained 78% in the past year but declined 6.8% in the past week. M/I Homes has a Momentum Score of B.
Based in Gurugram, India, MakeMyTrip is an online travel firm that sells travel products and solutions in India, the United States, Singapore, Malaysia, Thailand, the United Arab Emirates, Peru, Colombia, Vietnam and Indonesia. The company operates online travel brands, including MakeMyTrip, Goibibo and redBus. The stock has rallied 199.2% in the past year but lost 8.5% in the past week. MakeMyTrip has a Momentum Score of B.
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.
Click here to sign up for a free trial to the Research Wizard today.
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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Southern Copper Corporation (SCCO) : Free Stock Analysis Report
MakeMyTrip Limited (MMYT) : Free Stock Analysis Report
M/I Homes, Inc. (MHO) : Free Stock Analysis Report
