Stock Exchange: Are Momentum Trades Better Than Dip Buying?

This Week: Are Momentum Trades Better Than Dip Buying?

The answer to that question depends, of course, on a variety of factors including your trading personality, your timeframe, how you manage risk, and market conditions, to name a few. Our models (as shown in the following table) have been developed to take advantage of opportunities depending on all of the above factors. And we’re having continued success, but more data and evidence is never disparaged. After all, trading style can work well; until they don’t.

As the above table shows, some of our trading models utilize momentum strategies (Felix, Oscar and Athena) while others use some form of dip buying (Holmes and RoadRunner). For some perspective on how momentum stocks have been performing recently, here is a look at the iShares momentum index (MTUM) versus the S&P 500 (SPY), year-to-date.

As the chart shows, the momentum trade is basically lapping the strong performance of the S&P 500 this year. And regarding our models, momentum strategies (Felix, Oscar and Athena) have been outperforming dip buying models (Holmes and RoadRunner), which is not surprising considering the strong performance of MTUM. However, our dip buying models have been holding their own. And when the models are combined, they’ve been outperforming the market, with a low correlation to the market (a very attractive quality). However, as mentioned previously, more data and evidence is needed.

When implementing our models, we generally allow them to do their thing with limited human interaction—after all, we designed them to avoid many of the common mistakes that human traders often make, such as complacency, data overload, fear, unrealistic expectations, disciplined entry and exit points, and position sizing, to name a few.

Without further ado, here are this week’s model picks…

Expert Picks from the Models

This week’s Stock Exchange is being edited by our frequent guest: Blue Harbinger (also known as Mark D. Hines). Blue Harbinger is a source for independent investment ideas focused on value and income opportunities.

Holmes: This week I bought Vipshop Holdings (VIPS). Are you familiar with this company?

Blue Harbinger: Yes. It’s a Chinese company and it’s an ADR. It’s basically an online discount retailer for brand names. They have flash sales where they have a limited amount of brand name products to sell.