Stocks have plunged this year.
But looks can be deceiving. This market can still provide plenty of profits if you know where to look.
Judging by the S&P 500’s 20% drop this year, you might think there’s no place to hide from the carnage.
After all, the prior bull market’s high-flyers are getting walloped… posting declines that were unthinkable at the start of the year. Like with Amazon’s 46% plunge, or Tesla’s 44% drop.
Despite the mega-cap behemoths weighing down index returns, you can easily find plenty of stocks that are rallying on the year.
So today, I’ll show you how to use momentum to find stocks that are going up.
Not only can momentum factors spot stocks that should be on your radar to buy, but they showcase those to stay away from… and can even help you profit from falling stock prices.
Following the Herd
Momentum is used by a variety of investors.
Quant funds program momentum factors into their algorithms to decide which stocks to buy or sell. And technical analysts often refer to it as relative strength when breaking down their charts.
Whatever the situation, the objective is the same: focus on what is working and stay away (or bet against) from what isn’t.
That’s because momentum tends to persist in either direction. Stocks that are going higher and outperforming on an intermediate-term basis tend to keep doing well, and vice versa.
And there’s plenty of research from both academics and fund managers showing why momentum works.
It’s due to our behavioral biases – investors are human after all, and fear of missing out is a strong emotion.
Even fund managers are susceptible to herding behavior by plowing into the same stock. That’s because they chase hot stocks to avoid the risk of being fired by not owning the top performers.
And during a year when it seems like everything’s down, momentum factors would suggest otherwise…
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Don’t Fight the Trend
I have my own factor model to rank stocks based on momentum.
It uses metrics like trailing price returns, a stock’s industry momentum, and volume on up days relative to down ones.
If I apply those factors to the S&P 500 and rebalance every four weeks (about once per month) into the top- and bottom-ranked 10 stocks, here’s how that particular model would’ve performed over the past year…
While rebalancing into the top 10 stocks (equally weighted) has delivered a 4% gain over the past year, the bottom 10 stocks have plunged by 29%.
Put options, which gain in value when stock prices fall, are a fantastic way to profit from stocks showing downside momentum – especially during a bear market.
So even during turbulent market environments, momentum can guide you to the right opportunities, help you avoid catching a falling knife, and profit from declining prices.
Here’s a snapshot of stocks to put on your radar, and ones to stay away from based on current ranks:
Top Three S&P 500 Momentum Rank:
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Exxon Mobil (XOM)
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Diamondback Energy (FANG)
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Marathon Oil Corp (MRO)
Bottom Three S&P 500 Momentum Rank:
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Meta Platforms (META)
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Paramount Global (PARA)
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Align Technology (ALGN)
That’s not a recommendation to bet on or against those stocks.
After all, momentum factors are just one pillar in my trading process. There are other factors like analyst revisions and profitability to rank the best opportunities the market has to offer.
But momentum is a key component that guides me to the stock market’s winners and losers as this bear market evolves.
Best regards,
Clint Brewer
Analyst, Market Minute
P.S. If you’d like to learn how to trade put options to bet against stocks, or call options to bet on a rally… My colleague Jeff Clark has an exclusive trading strategy he’s refined over 35 years in the market.
To keep things simple, he focuses on just one stock you can trade over and over again for consistent profits. So, try it out right here.
Reader Mailbag
With tech stocks down, what other sectors are you focusing on that could be considered “safe”?
Let us know your thoughts – and any questions you have – at [email protected].