Over the past couple of trading days, the equity market has backpedaled on its growth trajectory as the Federal Reserve’s policy meeting took centerstage. The two-day policy meeting from Sep 19 is likely to be a potential market catalyst, with investors looking for cues about the broader economy and the trajectory of future interest rate hikes. The downtrend was further accentuated by the rising 10-year Treasury yield, which hovered around 16-year highs.
Although relatively stable inflation data and a softening economy have fueled hopes of a pause in interest rate hikes, with the odds highly in favor of an unchanged interest rate, a tense undercurrent has apparently besieged the market. However, Fed’s economic forecasts and its commentary on the monetary policy are widely expected to buoy market sentiments and lift stocks off their lows. With looming 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 Super Micro Computer, Inc. ( SMCI Quick Quote SMCI - Free Report) , Builders FirstSource, Inc. ( BLDR Quick Quote BLDR - Free Report) and Axcelis Technologies, Inc. ( ACLS Quick Quote ACLS - 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 stocks out of nine that made it through this screen: Headquartered in San Jose, CA, Super Micro Computer manufactures high-performance server and storage solutions based on modular and open architecture across the globe. Its solutions range from complete server, storage systems, modular blade servers, blades, workstations, full racks, networking devices, server sub-systems, server management software and security software. With an end-to-end portfolio, it is one of the global leaders in Application-Optimized Total IT Solutions. The stock has gained 344% in the past year but declined 7.4% in the past week. Super Micro Computer has a Momentum Score of B. Based in Irving, TX, Builders FirstSource is reportedly the largest supplier of building materials, manufactured components and construction services to professional homebuilders, sub-contractors, remodelers and consumers. The company operates in more than 550 locations in 42 states across the United States. It offers an integrated solution to customers by providing manufacturing, supply and installation of a full range of structural and related building products. The stock has appreciated 129.7% in the past year but lost 4.6% in the past week. Builders FirstSource has a Momentum Score of A. Headquartered in Beverly, MA, Axcelis manufactures and services ion implantation and other processing equipment used in the fabrication of semiconductor chips in the United States, Europe and the Asia Pacific. The company offers high energy, high current and medium current implanters for various application requirements. The stock has rallied 172.9% in the past year but declined 6.7% in the past week. Axcelis 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