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Momentum Stocks Stay in Vogue

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Legendary investor Peter Bernstein once defined risk as meaning that “more things can happen than you think will happen.”

Even though risk is a loaded word that can be interrupted in many different ways, risk appetite is an important gauge of investment sentiment in financial markets.

For example, risk appetite in the bond market has been in contraction mode over the past six months. Fixed-income ETFs that hold debt with lower credit quality like the SPDR Barclays High Yield Bond ETF (JNK) and the PowerShares Senior Loan ETF (BKLN) are modestly down while investment grade debt – especially longer maturing bonds are soaring in value.

Whatever jitters exist in the bond market have not yet invaded the stock market.

A performance comparison of the iShares MSCI USA Momentum Factor ETF (MTUM) – a good proxy for the risk appetite of bullishly trending stocks – versus the S&P 500 shows that momentum stocks are adding to their recent brilliant performance.  

Over the past three months alone, MTUM has jumped 6% compared to a just a 2.5% rise for the S&P. MTUM has edged out the SPDR S&P 500 ETF (SPY) by 3.5% with an 18.5% one-year return. MTUM’s top 10 holdings include technology blue chips like Apple, Facebook, and Microsoft along with healthcare stocks like Amgen, CVS Health Corp. and Gilead Sciences.

Momentum oriented industry sectors, like biotechnology stocks (IBB) have also soared. IBB is up 11% over the past three months and is still outperforming the broader U.S. stock market year-to-date. The ProShares Ultra Nasdaq Biotechnology ETF (BIB) uses double daily leverage and has soared just over 21% during that same three-month time frame.

The Health Care Select Sector SPDR ETF (XLV) is another sector that’s been hot. XLV has already jumped almost 3% year-to-date, adding to its impressive 25% gain in 2014. The Direxion Daily Healthcare Bull 3x Shares (CURE), which triples the daily performance of healthcare stocks, gained 79.96%. With last year’s gain, S&P 500 healthcare stocks have now scored six consecutive yearly gains.

The fact that momentum stocks have not yet lost favor tells us much about investor sentiment. It gives us a snapshot of the stock market’s current mood. And right now it’s saying that risk taking is still in vogue.


Ron DeLegge’s is the founder and chief portfolio strategist at His next free portfolio workshop for financial advisors takes place at 1 p.m. Eastern Time on Friday, Feb. 27.