Momentum stocks may get an end-of-the-year push, history shows

Momentum stocks may get an end-of-the-year push, history shows

The subsequent six weeks are shaping as much as be particularly good for momentum methods within the inventory market.

Such methods lead traders to usually purchase the profitable stocks over the trailing yr and promote (or promote quick) the losers. This yr the sample is prone to be notably sturdy, for 2 causes.

The first is year-end tax-loss promoting, in accordance with Richard Sias, chair of the finance division on the University of Arizona. He was referring to what occurs when traders promote the stocks they’re holding at a loss to offset capital positive factors on which they in any other case must pay tax. This yr’s bifurcated market is tailored to supply plenty of such promoting: While some stocks have carried out spectacularly properly, many have misplaced floor.

One gauge of this break up market comes from the proportion of stocks with positive factors or losses. Of the 1,500 stocks within the S&P 1500 Index, for instance, 48% have year-to-date positive factors as of mid-November whereas 52% have losses. To put this in context, contemplate that one yr in the past, 80% of stocks had been sporting year-to-date positive factors and solely 20% had been sitting on losses.

As Sias put it to me: This yr there are “a lot of positive factors to offset and plenty of stocks to offset these positive factors.”

‘Window dressing’

The second motive momentum methods are prone to do properly this yr, in accordance with Sias: end-of-year window dressing. This occurs when establishments shift their portfolio holdings away from shedding stocks into their winners, with a view to keep away from the embarrassment of getting to point out, of their year-end experiences to shoppers, that they’d invested in shedding stocks. This window-dressing depresses shedding stocks and boosts the winners, which is exactly what produces a powerful momentum impact.

To ensure, end-of-year window dressing is current each December. What makes it prone to be particularly sturdy this yr is that the general market is up strongly. As of mid-November, for instance, the S&P 500 Index
SPX,
-0.67%

is up a dividend-adjusted 12.4%. So managers will probably be notably keen to not present shedding stocks of their portfolios as of yr’s finish.

Regardless of the person causes this yr, the long-run penalties are evident from the accompanying chart — on the prime of this column — of momentum’s month-to-month sample.

Specifically, the chart shows the month-to-month return variations of two hypothetical portfolios. The first incorporates the 10% of stocks with the most effective returns over the trailing yr, whereas the second incorporates the 10% with the worst returns. Notice that this distinction is considerably larger in December than in every other month.

January blues

Notice additionally from the chart that momentum tends to have its worst month of the yr, on common, in January. This stands to motive, Sias mentioned, as a result of as soon as New Year’s rolls round, the factitious pressures that had been miserable shedding stocks and boosting profitable stocks will probably be eliminated —and these stocks will are inclined to revert to the place they’d been beforehand.

This, in flip, means that, when you’re inclined to leap out and in of momentum methods in accordance with these seasonal tendencies, it’s best to get out earlier than the tip of the yr. However, you must also know that, given transaction prices and taxes, it would behoove you to easily stick to such methods by means of thick and skinny.

Regardless, if history is any information, chances are high good that you’ll be
particularly completely satisfied along with your efficiency between now and the tip of the yr.

Most of you who spend money on momentum methods will select an trade traded fund to take action. The one with probably the most property below administration is the iShares MSCI USA Momentum Factor ETF
MTUM,
-0.48%
.
Through Nov. 13, in accordance with FactSet, it has crushed the S&P 500 by a margin of 21.5% to 12.9% (assuming dividends had been reinvested).

Momentum winners

If you’re as a substitute enthusiastic about particular person stocks, I’ve listed, beneath, these with the most effective year-to-date returns (by means of Nov. 13) which can be additionally beneficial for buy by two or extra of the funding newsletters that my agency displays. They are listed in descending order of year-to-date returns:

FedEx Corp.
FDX,
-1.12%
,
82.2%

Qualcomm Inc.
QCOM,
-1.01%
,
66.9%

Apple Inc.
AAPL,
-1.09%
,
63.9%

Lam Research Corp.
LRCX,
-0.92%
,
47.6%

Barrick Gold Corp.
GOLD,
+0.41%
,
40.6%

Microsoft Corp.
MSFT,
-0.95%
,
38.4%

Lowe’s Cos.
LOW,
+0.22%
,
35.3%

Cummins Inc.
CMI,
-1.06%
,
35.2%

Facebook Inc. Class A
FB,
-1.18%
,
34.9%

McKesson Corp.
MCK,
-1.20%
,
33.4%

For the document, I ought to report that I offered an analogous listing of
stocks one yr in the past. For the month of December 2019, their common return was
5.2%, versus 2.9% for the S&P 500 (assuming dividends had been reinvested).

Mark Hulbert is a
common contributor to MarketWatch. His Hulbert Ratings tracks funding
newsletters that pay a flat charge to be audited. He might be reached at
[email protected]

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