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3 Momentum Anomaly Picks as Markets Stumble on Inflation Data
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The broader U.S. equity markets mostly trended down over the past few trading days on concerns regarding inflation and its consequence on the Federal Reserve’s pledge for a slew of rate cuts this year. The Producer Price Index (PPI) for February was up 0.6% month over month compared to broad-based expectations of a 0.3% rise. On a year-over-year basis, the PPI increased 1.6%, the highest since September 2023.
The higher-than-expected PPI reading, widely considered a measure of wholesale inflation, propelled the benchmark 10-year Treasury yields and dragged the equity markets down. Investors began to fret about its probable impact on the Federal Reserve’s policy meeting this week and whether it would at all loosen the monetary policy akin to widespread expectations.
Earlier, the Fed had pledged to cut interest rates several times in 2024 owing to a decelerating inflation trend in the later stages of 2023. However, given the recent inflationary data, the markets appear vulnerable to sudden downtrends. This, in turn, signifies that the markets need to brace for intense volatility owing to tempered expectations despite a relatively healthy U.S. economy and GDP data.
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 Dream Finders Homes, Inc. (DFH - Free Report) , Coinbase Global, Inc. (COIN - Free Report) and Forestar Group Inc. (FOR - 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.
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 seven that made it through this screen:
Headquartered in Jacksonville, FL, Dream Finders Homes develops single-family homes throughout the Southeast, Mid-Atlantic and Midwest, including Florida, Texas, North Carolina, South Carolina, Georgia, Tennessee, Colorado and the Washington, DC metropolitan area, which comprises Northern Virginia and Maryland. It also provides mortgage financing and title services to homebuyers. The stock has gained a stellar 191.5% in the past year but declined 6.2% in the past week. Dream Finders Homes has a Momentum Score of A.
Based in Wilmington, DE, Coinbase Global offers financial infrastructure and technology for the crypto economy in the United States and internationally. It provides a trusted platform that makes it easy for people and institutions to engage with crypto assets, including trading, staking, safekeeping, spending and fast, free global transfers.
The company offers the primary financial account in the crypto economy for consumers and a marketplace with a pool of liquidity for transacting in crypto assets for institutions. The stock has gained 222.5% in the past year but declined 5.6% in the past week. Coinbase Global has a Momentum Score of A.
Headquartered in Arlington, TX, Forestar Group operates as a residential lot development firm with operations in 57 markets and 23 states. It sells its residential single-family finished lots to local, regional and national homebuilders. It is a subsidiary of D.R. Horton, Inc. The stock has rallied 148.6% in the past year but declined 3.5% in the past week. Forestar Group 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.
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.
Image: Bigstock
3 Momentum Anomaly Picks as Markets Stumble on Inflation Data
The broader U.S. equity markets mostly trended down over the past few trading days on concerns regarding inflation and its consequence on the Federal Reserve’s pledge for a slew of rate cuts this year. The Producer Price Index (PPI) for February was up 0.6% month over month compared to broad-based expectations of a 0.3% rise. On a year-over-year basis, the PPI increased 1.6%, the highest since September 2023.
The higher-than-expected PPI reading, widely considered a measure of wholesale inflation, propelled the benchmark 10-year Treasury yields and dragged the equity markets down. Investors began to fret about its probable impact on the Federal Reserve’s policy meeting this week and whether it would at all loosen the monetary policy akin to widespread expectations.
Earlier, the Fed had pledged to cut interest rates several times in 2024 owing to a decelerating inflation trend in the later stages of 2023. However, given the recent inflationary data, the markets appear vulnerable to sudden downtrends. This, in turn, signifies that the markets need to brace for intense volatility owing to tempered expectations despite a relatively healthy U.S. economy and GDP data.
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 Dream Finders Homes, Inc. (DFH - Free Report) , Coinbase Global, Inc. (COIN - Free Report) and Forestar Group Inc. (FOR - 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 the seven that made it through this screen:
Headquartered in Jacksonville, FL, Dream Finders Homes develops single-family homes throughout the Southeast, Mid-Atlantic and Midwest, including Florida, Texas, North Carolina, South Carolina, Georgia, Tennessee, Colorado and the Washington, DC metropolitan area, which comprises Northern Virginia and Maryland. It also provides mortgage financing and title services to homebuyers. The stock has gained a stellar 191.5% in the past year but declined 6.2% in the past week. Dream Finders Homes has a Momentum Score of A.
Based in Wilmington, DE, Coinbase Global offers financial infrastructure and technology for the crypto economy in the United States and internationally. It provides a trusted platform that makes it easy for people and institutions to engage with crypto assets, including trading, staking, safekeeping, spending and fast, free global transfers.
The company offers the primary financial account in the crypto economy for consumers and a marketplace with a pool of liquidity for transacting in crypto assets for institutions. The stock has gained 222.5% in the past year but declined 5.6% in the past week. Coinbase Global has a Momentum Score of A.
Headquartered in Arlington, TX, Forestar Group operates as a residential lot development firm with operations in 57 markets and 23 states. It sells its residential single-family finished lots to local, regional and national homebuilders. It is a subsidiary of D.R. Horton, Inc. The stock has rallied 148.6% in the past year but declined 3.5% in the past week. Forestar Group 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.