Hunting for momentum stocks in a weak market
In a recent article I looked at the idea of screening for cyclical value in sectors such as energy, mining and industrials. I concluded that some opportunities may be starting to emerge, but that they’re only likely to be of interest for investors with fairly long timeframes.
This week, I want to spend time building a screen to identify stocks that may have the potential to deliver more immediate gains – stocks with strong momentum.
Investing in momentum stocks means following the trend. But there’s more to it than this. There’s ample academic evidence to support the view that price trends and earnings upgrades can drive outperformance over 6-12 month periods.
This chart shows how stocks with stocks with high-decile MomentumRanks have outperformed the FTSE All Share index since 2013:
Admittedly, it’s tempting to think that the current market is unlikely to provide many momentum opportunities. Rising interest rates may also dampen down investor enthusiasm for nosebleed valuations.
The FTSE 250 and SmallCap index are both down more than 15% this year, despite the recent rally. AIM has fared even worse:
However, as Ed commented in October, “there’s rarely a bear market...