With stocks languishing through a rough August, it’d be reasonable to expect the momentum factor would be doing the same or performing worse. However, when properly applied, that hasn’t been the case. Consider the AGFiQ U.S. Market Neutral Momentum Fund (MOM), which is up more than 8% this month while the S&P 500 is lower by 5%.
MOM seeks results that are in tune with Dow Jones U.S. Thematic Market Neutral Momentum Index. 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.
“There are still opportunities for investors to harvest some handsome gains—by chasing the market’s best performers or high-momentum stocks, and selling the worst performers,” reports Evie Liu for Barron’s. “High-momentum stocks have historically tended to outperform their lagging peers, but by just how much can depend on the macro environment.”
Marvelous Momentum For MOM
High momentum stocks are those that are capable of rising very fast in a short period, 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.
MOM leans toward stocks with the highest total return and shorts stocks with the lowest total return. Accordingly, if the momentum stocks are outperforming, the fund should reflect the outperformance. While traditional momentum ETFs have been solid this month, MOM is leading the way thanks to its long-short strategy.
The often discussed inverted yield curve could portend more upside for MOM over the near-term because that scenario historically benefits momentum fare.
“Since 1978, when the yield on 10-year Treasuries has been more than 2 percentage points higher than the two-year yield, high-momentum stocks in the U.S. have outpaced the low-momentum group by an average of 3.4 percentage points in the following 12 months, according to a recent note from Oppenheimer analyst Ari Wald,” according to Barron’s.
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