The broader equity indices declined in the past few trading sessions as investors remained wary of the latest jobs data. The jobs data, slated to be released later today, is widely expected to offer cues to the Fed’s rate hike program with key insights into the labor market and data related to non-farm payrolls, hourly wages and the unemployment rate. As the Fed has vowed to continue its aggressive stance to curb inflation, markets await clarity on the future rate hike program and its likely impact on the economy. 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 Archer-Daniels-Midland Company ( ADM Quick Quote ADM - Free Report) , Dillard's, Inc. ( DDS Quick Quote DDS - Free Report) and Clearfield, Inc. ( CLFD Quick Quote CLFD - Free Report) 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 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. of B or Better: Style Score 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: Illinois-based Archer Daniels is one of the leading producers of food and beverage ingredients as well as goods made from various agricultural products. The company processes oilseeds, corn, wheat, cocoa and other feedstuffs. It also engages in the manufacturing, sale and distribution of products like natural flavor ingredients, flavor systems, natural colors, proteins, emulsifiers, soluble fiber, polyols, hydrocolloids, natural health and nutrition products, as well as other specialty food and feed ingredients. Archer Daniels has gained 46.1% in the past year but declined 5.6% in the past week. It has a Momentum Score of A. Founded in 1938, Dillard's is a large departmental store chain featuring fashion apparel and home furnishings. Its merchandise mix consists of both branded and private-label items. The company’s strategy is to offer more fashion-forward and trendy products to attract customers. Dillard’s is benefiting from continued momentum in consumer demand and better inventory management. The stock has appreciated 43.3% in the past year but declined 3.9% in the past week. It has a Momentum Score of A. Headquartered in Minneapolis, MN, Clearfield is a leading provider of communication networks, telecom services and support solutions. The company is witnessing a strong demand environment, largely driven by an effort by rural broadband operators to establish themselves as dominant broadband access providers. In addition, Clearfield is gaining traction with Tier 2 carriers that aim to extend their fiber connectivity across the country. The stock has rallied 100.6% in the past year but declined 2.8% in the past week. It 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. 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 .