Has Momentum Investing Lost its Mojo?

Dangerous Road Curves Ahead

Former high flying industry sectors like biotech (NASDAQGIDS:IBB) and social media stocks (NYSEARCA:SOCL) have crashed between 14-16% over the past month. Have hot momentum stocks lost their mojo?

One proxy of momentum stocks is the iShares MSCI USA Momentum Index ETF (NYSEARCA:MTUM).

The fund owns 100-150 large and mid-cap U.S. stocks that are screened for risk-adjusted price momentum over 6- and 12-month time periods. The 6- and 12-month risk-adjusted price momentum calculations are then standardized at +/-3 standard deviations and the standardized z-scores are translated into an average momentum score. Stocks with the highest momentum scores are selected.

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Momentum investing (Nasdaq:AMOMX) is a system for buying stocks or ETFs that have outperformed the broader stock market (NYSEARCA:VTI). Generally, the strategy gives little consideration to a company’s valuation, earnings, or other fundamental data. One variation is to hold stocks trading about their 50-day or 200-day moving average and to sell them if they break below it.

MTUM Chart

Almost 50% of MTUM’s sector exposure is to healthcare (NYSEARCA:XLV) and consumer discretionary (NYSEARCA:XLY) stocks alone. Both sectors have smoked the S&P 500 over the past five years, but the tide could be turning.

MTUM’s top holdings are Facebook, Gilead Sciences (NASDAQGS:GILD), and Amazon.com. All three stocks currently trade below their 50-day moving average.

In previous market cycles, top performing sectors and stocks are typically the final shoe to drop, following the rest of the stock market down. In this particular cycle, hot performers have been crushed first, while the broader stock market has held up. Is this time different? So far it is.

The ETF Profit Strategy Newsletter uses technical and fundamental analysis along with market history and common sense to keep investors on the right side of the market. We cover major asset classes like stocks, bonds, and gold. In 2013, 70% of our weekly ETF picks were winners.

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