It will be interesting to see how these momentum stocks perform in a short-term market pullback

This has been an ideal market for professional momentum chasers like me. For last several weeks the market has rewarded momentum.

Many traders are skeptical of momentum strategies and which is a good thing. That is what makes market interesting. And creates profit for momentum traders.

However studies after studies show that the only persistent anomaly in the market is momentum.

If you study the momentum anomaly and various research related to it, you will find:
  1. Jegadeesh and Titman (1993) showed that there is substantial evidence that indicates that stocks that perform the best (worst) over a three to 12 month period tend to continue to perform well (poorly) over the subsequent three to 12 months. Momentum trading strategies that exploit this phenomenon have been consistently profitable in the United States and in most developed markets.
  2. Moskowitz and Grinblatt (1999) found evidence of momentum in industry returns. They found that high momentum industries outperform low momentum industries in the next six-months.
  3. Momentum profit reverse post 2 year holding periods.
  4. Firms that are followed by fewer stock analysts exhibit greater momentum.
  5. Like price momentum, stocks with high earnings momentum outperform stocks with low earnings momentum.
  6. A momentum strategy that buys stock near their 52 week high is profitable.
  7. Momentum effect is more pronounced in small stocks.

Momentum works the key is to make it work for you. As I have said before there are many things which work in the market provided you can build a bridge between the concept and a workable method. Most beginner traders fail to do that.
To trade momentum successfully you need to develop a setup based on momentum.

30 stocks with momentum

One of the questions raised yesterday was what will happen to these momentum stocks if market has a correction or pullback at this level. To understand that you have to look at stocks with momentum for a  month ago, 2 month ago, 3 month ago, and so on.

Corrections and pullbacks creates opportunities for momentum traders. During pullback some momentum stocks reverse, some form wide range, some have a very orderly and shallow pullback. When the correction gets over the last kind are the ones which breakout first.

If we understand this phenomenon well we can build lot of trading strategies around this.
Short term momentum (momentum of a month) is generally negative. Stocks with high momentum on monthly time frame will revert their momentum. Hence most professional momentum chasers look for a momentum stock with sideways move or pullback/consolidation in last 10 to 20 days before breakout. So the setup buys breakout after a weakness. Also setup exits in to strength without waiting for a pullback. Most swing trading strategies are built to exploit short term momentum. You can build both long and short strategies to exploit short term momentum. While I trade momentum primarily from long side traders there are some who do it very successfully using a short setup. For example look at Reaper Trades, he trades on short side.  The basic idea behind his setup is that short term momentum spike in penny stocks will mean revert.  There are many ways to skin the momentum cat provided you know how momentum works.

Medium term momentum (3 to 18 months) is good. Stocks with such momentum characters persist in their direction of momentum. They might have pullbacks on the way but they tend to breakout in direction of the momentum. IBD CANSLIM method is largely based on trading stocks with such medium term momentum characteristics. The IBD 100 and IBD 200 lists are primarily stocks with medium term momentum which also have growth characters like high EPS growth, high margin, high roe and so on. If you want to be position trader then you you need to build strategies around medium term momentum.

Long term momentum (momentum of 2 years plus) is not good. Typically such stocks tend to revert. Very few stocks can sustain such long momentum phases. Stocks become extremely overvalued or over owned by funds and investors and such stocks reverse. This phenomenon works in reverse also where stocks with very low long term momentum revert and go on to make big moves. Value investing and contrarian investing is based on understanding of such phenomenon. Successful long term short selling strategies are also based on this phenomenon. If you see the Virgins strategy  I have detailed it is based on such long term momentum reversal as basic idea. Same way when looking at Episodic Pivots candidates I look for stock with years of neglect with catalyst. Those are the stocks which make big moves.

If you understand how momentum works on these three time frames then you can design several strategies based on momentum. Ultimately growth and value investing strategies are subset of momentum strategies.

Understanding momentum is key to understanding the market. That is the most persistent phenomenon in market.

Are you serious about your trading?

If you are serious about your trading and want to build an enduring edge the Stockbee Member site might help you. Members tell me they have tried lot of things before coming to my site and it has offered them the most extensive and detailed methods to swing and position trade.

It is only for those who want to develop their own self sufficient trading method. It is not a stock picking service. It is service for you to build your own scans and trading method to have your own daily pick based on your method.

Be warned it will take you time to learn to trade. Learning to trade is difficult art and unless you are willing to spend months or years to perfect your strategy and also develop your mental edge you are unlikely to succeed in this game. Unless you understand that no site, no service, and no mentoring is going to work.

Why traders come to stockbee?

The member site is one of the most recommended site for learning to trade by other traders and bloggers. You will see no advertising, no hard marketing, no promotions, no free offers, no affiliate marketing, no incentive to other bloggers to promote the site, no constant twits self promoting the site, no free trial  and no tall claims of making you instantly wealthy, and yet the site attracts new  members everyday. Members come from all walks of life and all kinds of trading size and trading styles.

You will see that many trading bloggers have been using my market timing methods, scans , stock ranking lists and chart templates. They have developed their own methods based on my methods. Many paid newsletter site recommend my site to their subscriber for learning about trading and market.

Over the years thousands of traders have been members and those who benefited from the learning talk about the site to others or talk about the methods used and that is how new members learn about the site.

What will I learn in the members site?

The members site will give you in depth understanding to develop your own trading method. The emphasis is on making you self sufficient and confident of your own trading method and style.

As a member you will learn the basics of swing trading, momentum investing, growth investing and risk management.

You will learn about Stockbee Trend Intensity Breakouts method that uses momentum based swing trading to find 3 to 5 day swing trades for 8 to 40% profit.

You will learn about Stockbee Episodic Pivots Breakout method which uses Post Earnings Announcement Drift (PEAD) to find stocks that had a game changing earnings and that are likely to rally for 3 months to 12 months.

You will learn about  Stockbee Dollar Breakout method that uses momentum, range expansion and swing trading approach to find 5 to 40 dollar moves in high priced stocks.

You will learn about  Stockbee Lemonade Strategy for 401k which uses market timing and momentum to invest in 401k. You will get weekly update on how I am using the strategy on our 401k to do allocation decision.

You will learn about Stockbee Market Monitor method for market timing using breadth. It allows you to avoid risky periods in market and allows you to identify market turns. It is used for 401k allocation decisions.

You will learn about Stockbee Double Trouble method to find stock with confirmed upside momentum using anchored momentum and that are likely to continue their up move.

You will learn about Stockbee Night Time is Right Time method to find news catalyst based trade ideas for short term day trade and swing trade.

You will learn about Investor's Business Daily’s IBD 200 list and how it can be used to find swing trading candidates for explosive moves.

You will learn about Telechart 2000 and how to use it effectively to scan for swing and position trade ideas and to set up your 401k strategy.

You will learn about Jesse Livermore Range Breakout, Darvas Box setup, and many other member shared methods.

You will learn how to set up your own scans, select right kind of stocks, how to set up stops, when to enter , when to exit, how much to risk, how to track your trades and all other details about trading. You will learn about developing your own methods and not relying on others for trade ideas.

The site has hundreds of videos and trading methods and variation of methods. Members help each other in developing the methods and share actively their research and finding. A collaborative spirit allows you to get input from others on your trading ideas or problems.

The site gives you opportunity to interact with some of the most successful traders and learn from them about their trading methods. It is a vibrant community with members from different background and experience willing to help each other. The emphasis is on continuous learning and up gradation of market knowledge and setup knowledge. The members range from hedge fund employees, financial advisers, active swing traders, investors and new traders.

If you are looking to develop your own trading strategy the membership site might be for you. You have to be willing to put in the effort to build your own method. There are no silver bullets offered on members site. Every method, every scan, every nuance is detailed and all possible help is offered to design your own method.

Do you have a trial?

If you are just looking for trial you are better off trying thousands of other trading sites that offer free trial or one month trial and offer you promise of riches.

It is for those who are ready beyond the trial phase and ready to put serious months or years  of efforts to learn to trade on their own. It is for those who want to learn to find their own fish.

The free blog has all the details about the methods I trade and if you go through the posts highlighted in the sidebar you will learn about them.

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zephyro said...

Love the blog but slightly confused by this: "However studies after studies show that the only persistent anomaly in the market is momentum."

As far as I know there are four independent factors that have outperformed in the stock market which have survived robustness checks: 1)earnings, 2)value, 3)size & 4)momentum, so I use all of these to indentify trades. Would you agree with these?

Pradeep Bonde said...

Yes. And most strategies marry the other three with momentum to amplify returns.