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3 Momentum Anomaly Picks as Markets Avert Debt Ceiling Crisis

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The equity markets’ steady downtrend over the past few days has reversed following the U.S. House’s passage of the debt ceiling bill with bipartisan support. The bill was passed on the House floor after President Biden and House Speaker Kevin McCarthy reached a deal over the weekend to avoid a likely default. A default would have made the government incapable of borrowing any more money or repaying its bills, endangering the global economy and affecting prices and mortgage rates in other countries.

The deal was brokered after intense negotiations in which McCarthy successfully pushed for government spending cuts and changes to the work requirements for the Supplemental Nutrition Assistance Program. Passed by a vote of 314-117, the bill advanced to the Senate, from where it is expected to move to the President’s desk for his final approval. It would raise the government’s borrowing limit until January 2025, ensuring the seamless functioning of all government offices till the next Presidential election.

The focus has now shifted to the Federal Reserve’s Jun 13-14 policy meeting, which is likely to be another potential market catalyst. 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 Celsius Holdings, Inc. (CELH - Free Report) , MercadoLibre, Inc. (MELI - Free Report) and First Citizens BancShares, Inc. (FCNCA - 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 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 four stocks that made it through this screen:

Headquartered in Boca Raton, FL, Celsius develops and sells various functional drinks and liquid supplements in the United States and internationally. This global consumer packaged goods firm offers proprietary, functional, essential energy formulas clinically proven to offer significant health benefits to its users. The stock has gained 90% in the past year but declined 3.2% in the past week. It has a Momentum Score of B.

Buenos Aires, Argentina-based MercadoLibre is one of the largest e-commerce platforms in Latin America. The company is a market leader in e-commerce in Brazil, Argentina, Colombia, Chile, Ecuador, Costa Rica, Peru, Mexico, and Uruguay based on unique visitors and page views. The company also operates e-commerce platform in Honduras, Nicaragua, Dominican Republic, Salvador, Panama, Guatemala, Paraguay, Bolivia and Portugal. MercadoLibre stock has appreciated 48.1% in the past year but declined 4.7% in the past week. It has a Momentum Score of A.  

Headquartered in Raleigh, NC, First Citizens provides retail and commercial banking services to individuals, businesses and professionals. It offers an array of general banking services, including a network of more than 550 branches in 23 states and commercial banking expertise delivering best-in-class lending, leasing and other financial services coast to coast. The stock has rallied 79.2% in the past year but declined 3.9% in the past week. First Citizens 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:

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First Citizens BancShares, Inc. (FCNCA) - free report >>

MercadoLibre, Inc. (MELI) - free report >>

Celsius Holdings Inc. (CELH) - free report >>

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