The coronavirus-triggered economic downturn has significantly affected the U.S. labor market, slashing a record 20.5 million workers from nonfarm payrolls in April and dragging the unemployment rate down to 14.7%. Employment tumbled sharply in all major sectors, with particularly heavy job losses in leisure and hospitality. However, Wall Street shrugged off the dismal news about layoffs.
The Dow gained 1.9% closing at 24,331.32 on Friday. Meanwhile, the S&P added almost 1.7% to 2,929.80 and the tech-heavy Nasdaq moved up 1.6% to 9,121.32. With the earnings season winding down and several states reopening their economy, market participants will be monitoring key economic data. While the Fed has used its range of tools to support businesses, it is clear that the economic impacts are far more than anticipated and will be felt long after employees return to work.
With this in mind, reacting hastily to volatile trends can cause more damage to a portfolio’s return than a downturn. When value or growth investing fails to fetch sustained profits, one should explore another time-tested winning strategy that simply bets on the frontrunner stocks. This is known as momentum investing.
At the core, momentum investing is buying high, selling higher. It is based on the idea that once a stock establishes a trend, it is likely to continue in that direction. There’s a whole list of behavioral biases that most investors exhibit. For instance, some investors are anxious about booking losses and hence hold on to losing stocks for too long, hoping for a rebound in prices.
Meanwhile, a few investors sell their winners way too early. Momentum investing is one of the best strategies to avoid making such mistakes. So, it’s a way to profit from the general human tendency to extrapolate current trends into the future. Momentum investing is, thus, based on that gap in time, which exists before the mean reversion occurs i.e. before prices become rational again.
Here, we have created a strategy that will help investors get in on these fast movers when there is a short-term pullback in price, and rake in handsome gains.
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: No matter whether it is a good market or bad, stocks sporting a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. You can see the complete list of today’s Zacks #1 Rank stocks here.
Momentum Style Score of B or better: While ensuring solid momentum features, a Momentum Score of A or B knocks out a lot of the screening process, as it takes into account several factors including volume change and relative performance. 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 prices of the stocks should not be too low.
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 the three stocks that made it through this screen:
Acacia Communications, Inc. (ACIA - Free Report) manufactures and sells high-speed coherent optical interconnect products that are designed to transform communications networks through improvements in performance, capacity and cost. The stock has gained 33% in the past year but dropped 1.6% in the past week. It has a Momentum Score of A.
Headquartered in New York, Virtu Financial, Inc. (VIRT - Free Report) is a financial services firm that leverages technology to provide execution services and data, analytics and connectivity products to its clients, and deliver liquidity to global markets. The stock has lost 4.5% in the past year and has a Momentum Score of A. Shares of the company have declined 1.4% in the past week.
Luminex Corporation (LMNX - Free Report) manufactures and sells proprietary biological testing technologies and products for the diagnostics, pharmaceutical and research industries worldwide. The stock has surged 54.9% in the past year and has a Momentum Score of A. Shares of the company have declined 6.6% in the past week.
You can get this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own 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.
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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.