Why We Pay Attention When Momentum Breaks Down

[Trading With Larry Benedict]( Why We Pay Attention When Momentum Breaks Down By Eric Shamilov, analyst, Trading With Larry Benedict After all the noise in the market quiets down each day, I like to gauge sentiment. And I’ve consistently noticed that bears and bulls blame momentum for everything. But is there any edge to it? Does momentum actually help your trading? Last week, [I introduced the concept]( of trading “factors.” Factors are segments of the market that slice and dice various fundamental forces – momentum being one of them. As you can see from the chart below, momentum alone is a zero-edge strategy. [chart] This chart shows the S&P 500 Momentum Index. It measures the effect of going long on the top 20% of stocks in the S&P 500 (ranked by 12-month returns) and shorting the bottom 20%, rebalanced monthly. Since 2002, it has returned -56%. That certainly doesn’t look like an edge. So you maybe asking,“If momentum doesn’t give traders an edge, why use it?” The answer is the value it brings to market intelligence. Recommended Link [Reclusive trader scores 20 straight years of winning trades. Learn how]( [image]( He had 20 straight years of winning trades without a single losing year… That put his hedge fund in the top 1% of Barron’s rankings. He was featured in the popular trading book, "Hedge Fund Market Wizards, How Winning Traders Win…” Earning the coveted title “Market Wizard”… Last year, he was one of the few experts who accurately predicted the 2022 stock market collapse... Telling a reporter in January, “All indexes will be negative for the year." Almost immediately, the market tanked. The Nasdaq posted its worst start in history…. And the DOW had its worst start since World War II. While most folks lost money… This trader showed those following his work how to avoid the carnage and profit from it. And now, for the first time ever, he is coming forward to share a brand-new forecast. In his video, Market Wizard Larry Benedict reveals how to make all the money you need… In any market… Using a single stock. [Click here to watch the video now.]( -- Abrupt breakdowns in this factor coincide with abrupt macro regime shifts, like in March 2009 after the Great Financial Crisis and even the big market reversal we saw this year. As long as momentum has, well, momentum, then the current market conditions will likely continue. And when it breaks down, the market shifts to a new theme. Because when momentum breaks down, price reversion becomes the dominant theme. We can see that when we zoom in on the last 12 months. It explains the plight of both bulls and bears. (Or as I like to call them, “the opinionated.”) [chart] Momentum was carrying along fine until November when it abruptly spiked down. Even though the market as a whole was still weak at the end of the year, there was already a seismic shift underway below the surface. You could no longer simply short tech and buy sectors like energy. That strategy began to fade. And by January, it was obliterated. The entire momentum trade from 2022 unraveled within a month. Momentum picked up again this year, as the composition of the momentum basket changed. Free Trading Resources Have you checked out Larry's free trading resources on his website? It contains a full trading glossary to help kickstart your trading career – at zero cost to you. Just [click here]( to check it out. More recently, though, momentum is receding again. The tide hasn’t fully shifted yet, but it’s threatening to do so. That tells us something is about to shift in the market. That’s useful information, of course, but it’s not specific enough to give us an edge with trading. Yet if momentum alone doesn’t give us an edge, what’s another factor that will? When we look at the “R&D to Sales” factor, we see something else interesting. As the name implies, this ranks the S&P 500 stocks based on their percentage of revenue that’s reinvested into research and development (R&D). Notably, the top-ranked R&D to Sales stocks have been obliterated this year while the tech-heavy Invesco QQQ Trust Series 1 (QQQ) is up 38.6%. [chart] Right now, it’s peppered with biotech stocks. This is a surprise because biotech stocks are high beta plays that have fallen in the recent rising market. Companies like Incyte (INCY) and Moderna (MRNA) were trading below even the most bearish of Wall Street estimates up until recently. So, this is another sign that they may soon start catching a bid. From an intuitive point of view, R&D to Sales is a factor of long-term dominance. These companies make enough money and have the confidence to plow cash back into the business to research and innovate. Eventually, that investment pays back in large multiples. Think of Amazon (AMZN) back when analysts were upset over its lack of cash flow and Bezos didn’t care. As Harvard Business Review put it, he “trained… the investment community to expect that low profits (or big losses) now represent investments that will eventually pay off.” So using factors like these, we can spot trends in the market that are worth paying attention to. Biotech should be on our radar in the coming weeks. Regards, Eric Shamilov Analyst, Trading With Larry Benedict IN CASE YOU MISSED IT… [ATTENTION: Digital Dollar Could Send this $0.25 Play Skyrocketing]( In just a few days, the U.S. government could announce [this mandatory recall on the U.S. dollar…]( And replace it with a new digital dollar. And that could send [this $0.25 alternative investment skyrocketing.]( This is the same type of investment that’s already attracting the attention of legendary investors and billionaires like Elon Musk, Mark Cuban, and George Soros. If you know the necessary steps to take right now, not only will you protect your money, you could come out of this shift wealthier than you ever thought possible. But you need to act fast. [Click here to get the exact steps to take right now.]( [image]( [The Opportunistic Trader]( The Opportunistic Trader 55 NE 5th Avenue, Delray Beach, FL 33483 [www.opportunistictrader.com]( To ensure our emails continue reaching your inbox, please [add our email address]( to your address book. This editorial email containing advertisements was sent to {EMAIL} because you subscribed to this service. To stop receiving these emails, click [here](. The Opportunistic Trader welcomes your feedback and questions. But please note: The law prohibits us from giving personalized advice. To contact Customer Service, call toll free Domestic/International: 1-888-208-6550, Mon–Fri, 9am–5pm ET, or email us [here](mailto:feedback@opportunistictrader.com). © 2023 Omnia Research, LLC. All rights reserved. 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