For Immediate Release
Screen of the Week of Zacks Investment Research:
Leverage the Price Momentum of These 4 Stocks
It has been two decades since academics zeroed in on what we call today the “momentum effect” in stock markets. Momentum is basically the tendency of winning stocks (i.e. stocks that have outperformed the market in recent times) to keep winning and losing stocks to keep losing.
It is based on the idea that once a stock establishes a trend, it is more likely to continue in that direction instead of moving against the drift. Unlike the hugely followed Value or Growth styles, this strategy has barely anything to do with the fundamentals of a company, and instead, works with the human penchant to extrapolate current trends into the future.
At the core, momentum investing calls for investors to “Buy High, Sell Higher.”
Why Does the Momentum Strategy Work?
There is a simple reason behind this. It works because we are human!
There’s a whole laundry list of behavioral biases that most investors exhibit, and these emotional responses and mistakes are the very reasons why momentum strategy works. For instance, we all know of investors who are afraid to book losses, and hence hold on to losing stocks for too long, hoping that they will spring back. Conversely, some investors sell their winners way too early.
Furthermore, investors initially tend to under-react to news, events or data releases. However, once things become clear, they tend to go with the flow and overreact, causing dramatic price reactions.
These behavioral problems extend trends and thus, open up huge opportunities for momentum players. So basically, it’s a way to profit from the general human tendency to extrapolate current trends into the future.
Momentum investing is based on that gap in time which exists before the mean reversion occurs, i.e. before prices become rational again.
Momentum Versus Other Styles
It is worth reflecting over how the momentum strategy compares with other styles of investing over time. Recent research indicates that the size premium for small-cap stocks has shrunk dramatically since the 1980s and value premium has declined radically since the 1990s. Academics are of the opinion that once research on factor premiums (like size and value) becomes known to public, the investment world catches on and the premium gradually erodes.
Nonetheless, unlike other investment styles, momentum premium has stood the test of time, remaining remarkably robust ever since it was identified by financial academics in the 1990s.
Chase the Alpha
Momentum strategies have been known to be alpha-generative over long periods of time and across markets. So obviously, this strategy is quite tricky to implement, as detecting these trends is no child’s play.
Here, we have created a strategy that will help investors get in on these fast movers and make handsome gains. Our screen will help you take advantage of both long-term price momentum and a short-term pullback in price, which will reflect some profit-taking in the stock.
And that's what we're screening for today…
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/307349/leverage-the-price-momentum-of-these-4-stocks
Get the remaining stocks on the list and start putting this and other ideas to the test. It can all be done with the Research Wizard stock picking and back testing software.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
About Screen of the Week
Zacks.com created the first and best screening system on the web earning the distinction as the "#1 site for screening stocks" by Money Magazine. But powerful screening tools is just the start. That is why Zacks created the Screen of the Week to highlight profitable stock picking strategies that investors can actively use.
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