The global growth slowdown that began in early 2018 is expected to end soon, thanks to easier financial conditions and a likely end to the tariff war. Slightly better growth, limited recession risk, and friendly monetary policy should provide a decent background for financial markets in early 2020.
The U.S. equity market has been on fire this year with the S&P up 24.6%, the Dow rallying 20.7%, and the Nasdaq gaining 31.2% year to date. But this should not be a surprise to investors as the U.S. economy is strong and the job market is at its best in nearly five decades.
However, concerns about the impact of higher corporate taxes on profits could rise in the runup to the U.S. presidential election. This apart, rising wages is likely to reduce profit margins over the next several years.
As a general rule of investing, reacting emotionally to volatile trends can cause more damage to a portfolio’s return than the downturn itself. That said, 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, there are investors who 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 mistakes. So, basically, 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.
Screening Parameters
Percentage Change in Price (52 Weeks) = Top #50: This item 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 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 eight stocks that made it through this screen:
Kirkland Lake Gold Ltd. KL engages in the acquisition and operation of gold properties. The stock has gained more than 91% in the past year but declined 18% over the past week. It has a Momentum Score of A.
Target Corporation TGT operates as a general merchandise retailer in the United States. The stock has added almost 78% in the past year and has a Momentum Score of A. Shares of the company have lost 1.4% over the past week.
Guardant Health, Inc. GH, which is a precision oncology company, provides blood tests, data sets, and analytics in the United States and internationally. The stock has jumped more than 120% in the past year but fell 0.2% over the past week. It 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 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.
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