Is the Winning Momentum Trade Losing Steam?
Top technical analyst, Jonathan Krinsky, suggests that the winning momentum trade may be approaching an inflection point, signaling a potential shift in market dynamics.
The GS High Beta Momentum Long Index has been performing exceptionally well this year, with a 14% increase so far in 2024. On the other hand, its counterpart, the GS High Beta Momentum Short Index, has experienced a decline of 7% over the same period.
Krinsky highlights that the last time such a significant movement occurred between these two indices was in November 2022, which marked a short-term turning point for the market. This raises concerns that the momentum trade may be losing momentum itself, as it appears to be overbought, potentially leading to a momentum unwind.
To illustrate the stretched nature of the momentum trade, the iShares Edge MSCI USA Momentum Factor ETF is currently trading 26.5% above its 200-day moving average, reaching its widest difference in a decade. Krinsky comments, “This is not a call on the overall market, but we are likely nearing an inflection in momentum, where high-momentum falls, low-momentum rallies, or both.”
While the equity rally has been helped by easing inflation and the expectation of reduced borrowing costs later in the year, a higher than anticipated Consumer Price Index (CPI) number may create uneasiness among stock bulls. Additionally, small-cap growth stocks are showing signs of breaking out of a two-year range, while overlooked mid-caps are on the verge of testing their all-time highs from 2021.
In terms of specific stocks, Academy Sports & Outdoors, Camping World, ETSY, and Sonic Automotive are among those that exhibit constructive charts and have a high short interest as a percentage of their float.
As U.S. stock-index futures remain mildly mixed, the dollar sees a slight increase in strength, while oil prices decline and gold trades at around $2,020 an ounce. Keep an eye on the evolving momentum trade as it may signal a turning point in the market.
Analyst comment
Positive news: The winning momentum trade has been performing exceptionally well, with a 14% increase so far in 2024.
Neutral news: Technical analyst Jonathan Krinsky suggests that the momentum trade may be losing steam and reaching an inflection point, potentially leading to a momentum unwind.
Market prediction: The market may experience a turning point as the momentum trade loses momentum and high-momentum stocks fall while low-momentum stocks rally.
