Over the past week, the broader equity markets witnessed the longest rally since November 2021 as the Federal Reserve maintained the interest rates steady in the range of 5.25% to 5.5%. Investors widely expect the Fed to keep the rates unchanged in December as well, owing to solid economic growth. This, in turn, forced the bond yields to slide, which have been hovering around 5% for some time – the highest since 2007.

The equity market uptrend was further buoyed by a soft monthly jobs report that revealed non-farm payrolls improved by 150,000 in October compared with the consensus forecast for a rise of 170,000. The figure marked a sharp decline from 297,000 in September. The unemployment rate rose to 3.9%, the highest level since January 2022, with a significant decline in household employment. However, latent threats related to geopolitical conflicts and unstable oil prices remained concerns for the broader markets.

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 EMCOR Group, Inc. (EME Quick QuoteEME - Free Report) , Agilysys, Inc. (AGYS Quick QuoteAGYS - Free Report) and Arch Capital Group Ltd. (ACGL Quick QuoteACGL - 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:

EMCOR Group is one of the leading providers of mechanical and electrical construction, industrial and energy infrastructure, as well as building services for a diverse range of businesses. The company has been gaining from continued growth across segments, including the underlying strength in the retrofit markets with a focus on energy efficiency and Indoor Air Quality, which also leads to emissions reduction. The stock has gained 42.4% in the past year but appreciated a mere 0.9% in the past week. EMCOR Group has a Momentum Score of A.

Alpharetta, GA-based Agilysys offers hardware and software products to the hospitality industry in North America, Europe, the Asia-Pacific, and India. It offers point of sale, property management systems, inventory and procurement, payments, activity scheduling, reservations management, and related solutions to hotels, resorts and cruise lines, casinos, corporate food service management, restaurants, universities, stadiums and healthcare applications. The stock has appreciated 35.2% in the past year but gained 1.5% in the past week. Agilysys has a Momentum Score of B.  

Headquartered in Pembroke, Bermuda, Arch Capital provides insurance, reinsurance and mortgage insurance across the world. The company offers a full range of property, casualty and mortgage insurance and reinsurance lines while maintaining a focus on writing specialty lines of insurance and reinsurance. The stock has rallied 48.4% in the past year but declined 1.5% in the past week. Arch Capital 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.