Momentum remains an attractive late-cycle investment strategy, according to Ari Wald, Technical Analyst at Oppenheimer.
Wald looks at the relative returns of momentum stocks 3, 6 and 12 months before and after each major market top since 1928. Using a strategy that rebalances monthly and invests in the top-performing quintile of S&P 500 stocks (from the prior 12-month period), he finds that momentum averages an 8% relative gain in the six months before a top (see Chart 1), and outperforms the market 81% of the time through this rising market period. After the peak, Wald finds that returns are mixed over the next six months, coming close to the market average.
Wald’s overall view for US equities continues to be bullish. This is based on two factors: i) the S&P’s break above January resistance, which suggests the bull market has resumed, and ii) the good level of market participation in the move – 70% of the S&P’s market cap is an uptrend (i.e. 50-day moving average > 200-day moving average), (see Chart 2).