Displaying items by tag: momentum
Momentum funds often get bad press. While they have obvious utility, a lot of people say they feed bubbles and are subject to very big losses from market corrections. That said, some funds have started to do an excellent job at both hedging and outperforming to the upside. While that might sound impossible, it is not as hard as it sounds. The key is to follow the market’s movement, but not try to predict it. In other words, in strongly upward markets, you position yourself very bullish (e.g. 200% exposure). In downward markets, you take an inverse or short exposure to profit from losses. In a decent market you simply stay at 100% long exposure. By using this approach you can participate it more of the upside and lose less on the downside.
FINSUM: This is a smart strategy and one that some momentum funds are using to outperform the market right now. It can be employed either by buying funds or with an options strategy.
One prominent short seller has come out warning investors about Tesla, 2020’s rocket ship stock. Citron Research, a legendary short-seller, says that investors should dump Tesla’s stock, as the gains have all been “computer-generated”. The stock closed up 14% again yesterday. Citron says “This is obviously a computer-generated rally, it’s not a reflection on the company, or on valuation. It’s just a trade … Yes, I'm shorting it…whoever bought it at these prices has to flush it out, and when it flushes, it’s going to flush hard.” The firm also referred to Tesla’s stock as a casino.
FINSUM: Tesla is up 112% in 2020. This is a case study in irrational exuberance, or what might now be called “momentum”.
It has been for around a decade that value stocks have been getting hammered by growth stocks. The rut has been so bad that many have given up on the discipline altogether. But recently, something has been changing. Momentum stocks, long the darling of this bull market, have started to lag their value-oriented peers. This change started last week and is continuing today, and follows the worst month for value stocks in at least 20 years (this past August).
FINSUM: This is an encouraging sign, but certainly is not enough to say “value stocks are back!”.
Want to know one of the biggest risks in equity markets right now—parity, and we don’t mean between asset classes, we mean between investors’ portfolios. Momentum buying, or buying up stocks that have performed the best, has become such a hot strategy this year that both mutual fund holdings and hedge fund holdings look very similar. Everyone has the same basket of stocks, such as Mastercard, Paypal, Amazon, and Microsoft.
FINSUM: Since value investing has all but died—no one is interested in undervalued stocks—portfolio parity is increasing. This seems like a big risk that will magnify a reversal.
Small caps socks are having a rough year relative to the S&P 500. The Russell 2000 is up 15%, but behind the 19% gain of large caps. However, one area of small caps is doing great—momentum small caps, which are ahead of even their large cap cousins. Funds like the Invesco DWA SmallCap Momentum (DWAS), are up 26% this year through Wednesday. The fund aims to match the performance of the best 10% of stocks in the Russell 2000. Speaking broadly on the performance, the head of research at Nasdaq Dorset Wright says “Momentum can thrive in a market where you have a wide range of dispersions, and that’s especially true in the small-cap space, where you can have a big difference between the best and worst performers”.
FINSUM: There is a quite a variance in performance and financial conditions of small cap companies, and given the prevailing environment, that is creating highly differential results, which is great for momentum funds.