4 Stocks With Momentum Anomaly To Buy Right Away

Of late, the increased market volatility, primarily due to the long-running trade tussle between the world’s two largest economies, has resulted in renewed panic for many investors.

While it may be difficult to remain calm during a steep market decline, it’s important to remember that volatility is part of investing. For long-term investors, reacting emotionally to volatile trends can be more damaging to portfolio performance than the downturn itself. By adhering to a well-thought-out investment plan, investors may be better off during periods of short-term uncertainty.

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 more 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 the prices. On the other hand, a few investors sell their winners way too early. And momentum investing is one of the best strategies to avoid making such mistakes.

Momentum strategy works because investors initially tend to underreact to news, events or data releases. However, once things become clear, they tend to go with the flow and overreact, causing dramatic price reactions.

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 that exists before the mean reversion occurs, i.e. before prices become rational again.

Momentum strategies have been known to be alpha-generative over a long period of time and across market stages. So obviously, this strategy is quite tricky to implement as detecting these trends well ahead of time is no child’s play.

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.

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Zacks Rank #1: No matter whether good market or bad, stocks with a Zacks Rank #1 (Strong Buy) have a proven history of outperformance. You can see Original post

Written By: Zacks Investment Research