Stocks are highly volatile, risky at any point in a market cycle, especially in the weeks leading up to a bull market. That is the conclusion I reach when I analyze all the US bull markets since 1926. The stocks are generating a wave of non-bullish momentum at the same time as the broad market average. Instead, they begin to lose steam a few weeks before.
This is why the recent behavior of momentum stocks is potentially worrying. Review of iShares MSCI USA Momentum Factor ETF
is the largest ETF that pursues a momentum strategy in the US stock market. It lags behind the S&P 500
rose 6.6 percentage points in the first quarter, down 0.2% from the 6.4% increase in the index. That was the worst quarterly performance for an ETF since its inception in 2013.
This does not guarantee that a market top is imminent, needless to say. It is worth noting that this ETF has been very strong so far this April, even with Monday’s sharp drop. However, the dismal performance of the ETF’s first quarter is still ominous.
Consider what I found when analyzing high and low momentum stocks since 1926, based on data compiled by Dartmouth University professor Ken French. The high-momentum portfolio contains the 10% of the stocks with the best year-to-date returns, while the low-momentum portfolio contains the worst year-to-year analysis team. I have calculated the return on these two portfolios during the final weeks of all bull markets in the bull market calendar maintained by Ned Davis Research.
Contrary to the conventional pattern in which the high momentum category comes first, the low momentum category appears above the average head during those final weeks.
Why is that possible? My hunch is that market leadership often changes as bull markets near the end. The stocks that begin to show the greatest relative strength will be those in recession-resisting industries, such as the Consumer Staples, as investors look around the curve to predict what’s to come. with pike. On the contrary, stocks in the most sensitive economic sectors (like Energy) will begin to show relative weakness. This change in leadership can undermine momentum strategies, which is an implicit bet that the strongest of the past will continue to exist.
The failure of momentum near the top of the market in turn illustrates a broader point: Peaks are gradual, engaging jobs, not just one day’s work. So we should pay more attention to the intrinsic market rather than just paying attention to the broad market averages. The performance of the stock momentum strategy is one such intrinsic.
Another fire in the wind: The top performance reports I follow are betting that low-momentum stocks outperform stocks with high momentum. I came to this conclusion after building two 50-stock lists. The first contains the best performers in the S&P 1500 for the past 12 months and the second contains the worst performers. Currently, there is no stock of the best performing stocks proposed by even two of the best performing news.
In contrast, three of the worst performers were suggested by more than one of the following bests:
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be contacted at [email protected]