Plenty of plain vanilla equity strategies are suffering as the novel coronavirus grips the market, but the AGFiQ U.S. Market Neutral Momentum Fund (MOM) is showing signs of life after gaining nearly 3% over the past week.
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.
Moreover, MOM is up 14.39% year-to-date, a breathtaking performance relative to traditional equity benchmarks.
Since September, the movement to value stocks has been persistent and is spilling over into the early goings of 2020. The rotation could still continue, especially with the central bank easing monetary policy as evidenced by three rate cuts in 2019. That could add to the case for MOM over the near-term.
Marveling at MOM
Momentum investing can target those companies that are exhibiting high levels of growth. The momentum factor selects company stocks that have recently outperformed based on the idea that “the trend is your friend” and that stock market leaders typically continue to outperform. This type of strategy can be an effective way for targeting growth-oriented companies since stocks with positive momentum often continue to generate strong earnings.
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.
By market value, MOM’s long positions are typically larger than the stocks the fund shorts. Additionally, the fund’s long stocks have higher earnings multiples, but high valuations are often a trait of some of the stronger momentum equities.
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.
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 investing ideas, 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.