Some momentum stocks are being punished amid fears that the COVID-19 outbreak will weigh on global economic growth, a scenario that is lifting the AGFiQ U.S. Market Neutral Momentum Fund (MOM).

MOM seeks results that are in tune with Dow Jones U.S. Thematic Market Neutral Momentum Index. In order for the fund to accomplish its goal, “MOM provides exposure to the ‘momentum’ factor by investing long in U.S. equities that have had above-average total returns and shorting those securities that have had below-average total returns,” according to the fund’s fact sheet.

Year-to-date, MOM is higher by 9.35% as of Feb. 20.

Momentum—once it picks up, it can be difficult to stop and while the debate in the capital markets is whether value can sustain its lead over growth, investors can’t forget about the momentum factor, especially if events like a U.S.-China trade deal can spark a year-end rally.

A Simple Idea

The momentum strategy is based on a simple idea, the theory about momentum states that stocks which have performed well in the past, should continue to perform well, while on the other hand, stocks which have performed poorly in the past, should continue to perform poorly.

Recent price action confirms MOM’s approach is working and should continue to be effective as long as high momentum price stocks outperform low momentum price stocks. The way the fund is set up there is an opportunity to generate positive returns regardless of the direction of the general market.

“Momentum investing’s strong record of success as a strategy has vexed academics and market professionals alike because it defies one of modern finance’s key tenets: that markets are efficient. In part, efficiency means that no trading pattern should persistently beat the market because as soon as investors learn it, stock prices should quickly adjust to remove the easy reward potential,” wrote Tom Petruno in the UCLA Anderson Review.

High momentum stocks are those that are capable of rising very fast in a short period of time, which makes them very attractive to potential buyers. However, in many cases, these stocks can also crash unexpectedly and carry significant risks as a result. When handled properly, however, momentum trading can be a rewarding method of profiting from the stock market.

For more on alternative strategies, please visit our Alternatives Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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