Published on 8 May 2024 on Zacks via Yahoo Finance

3 Momentum Anomaly Stocks to Bet on as Markets Move Northward

The broader U.S. equity markets witnessed an upward trajectory over the past few trading days in one of the longest winning streaks observed since December 2023, buoyed by the optimism regarding a probable interest rate cut by the Federal Reserve in the near future. With weaker-than-expected job growth per the April nonfarm payrolls report and moderating wage gains, investors are pricing in a second rate cut by the end of the year with a nearly 50% likelihood of a 25-basis point rate cut in September.Recent data from the nonfarm payrolls report showed job additions of 175,000 in April, well below the broader expectations of 240,000, with wage figures also coming in less than expected. This allayed investor fears that the economy was “overheating” or “reaccelerating” and propelled the stocks. In addition, the Middle East ceasefire with Hamas accepting an Egyptian-Qatari proposal to end the war with Israel boosted the stocks. The equity markets were also aided by Fed Chairman Jerome Powell's comments, which largely ruled out a central bank hike in its next policy meeting after holding the rates steady between 5.25% and 5.50% in May.   Amid the uncertainty, investors often seek to employ time-tested winning strategies to fetch sustained profits. One of the most successful game plans to beat the blues is to bet on momentum stocks when value or growth investing fails to generate the desired profits.This approach primarily tends to follow the adage, “the trend is your friend.” At its core, momentum investing is “buying high and selling higher.” It is based on the idea that once a stock establishes a trend, it is more likely to continue in that direction because of the momentum that is already behind it. But before we delve deep into it, let us try to fathom why does the momentum strategy at all work?There are several behavioral biases that most investors exhibit in their decision-making. And these emotional responses, or rather mistakes, make the momentum strategy work.For example, some investors are anxious about booking losses and hence hold on to losing stocks for too long, hopeful of a rebound in prices. On the other hand, a few investors sell their winners way too early. Momentum investing is one of the best strategies to avoid making such errors in judgment.Furthermore, investors initially tend to underreact to news, events or data releases. However, once things become clear, they have a habit of going with the flow and overreacting, causing dramatic price reactions. These behavioral problems extend trends, thus opening up huge opportunities for momentum players.To sum up, momentum investing is a way to profit from the general human tendency to extrapolate current trends into the future. It is based on that gap in time before the mean reversion occurs, i.e., before prices become rational again.In this context, stocks like Royal Caribbean Cruises Ltd. RCL, Super Micro Computer, Inc. SMCI and Leidos Holdings, Inc. LDOS are worth betting on.Momentum strategies have been known to be alpha-generative over a long period and across market stages. So, this strategy is quite tricky to implement, as detecting these trends is no child’s play.Here, we have created a strategy to help investors get in on these fast movers and rake in handsome gains. Our screen will help you benefit from both long-term price momentum and a short-term pullback in price.

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