The short-term equity market rally ran out of steam last week as market correction pulled back the growth momentum and triggered a mini slide. Despite signs of a resilient economy with the personal consumption expenditures price index rising 2.6% in the second quarter, moderating inflation with the Federal Reserve hiking interest rates by a quarter percentage point, and solid corporate earnings, the markets appeared to be under “constructive rotation”.

The downtrend was further hastened over the past couple of trading sessions with credit rating agency Fitch trimming the long-term foreign currency issuer default rating for the U.S. to AA+ from AAA, citing “expected fiscal deterioration over the next three years”. However, investors have broadly taken the decline on a positive stride as fundamental views about the economy, in general, remain relatively strong.

With uncertainty becoming the norm, investors often seek to employ time-tested winning strategies to fetch sustained profits. One of the most successful game plans to beat the blues is to bet on momentum stocks when value or growth investing fails to generate the desired profits.

This approach primarily tends to follow the adage, “the trend is your friend.” At its core, momentum investing is “buying high and selling higher.” It is based on the idea that once a stock establishes a trend, it is more likely to continue in that direction because of the momentum that is already behind it. But before we delve deep into it, let us try to fathom why does the momentum strategy at all work?

There are several behavioral biases that most investors exhibit in their decision-making. And these emotional responses, or rather mistakes, are the very reason that makes the momentum strategy work.

For example, some investors are anxious about booking losses and hence hold on to losing stocks for too long, hopeful of a rebound in prices. On the other hand, a few investors sell their winners way too early. Momentum investing is one of the best strategies to avoid making such errors in judgment.

Furthermore, investors initially tend to underreact to news, events or data releases. However, once things become clear, they have a habit of going with the flow and overreacting, causing dramatic price reactions. These behavioral problems extend trends, thus opening up huge opportunities for momentum players.

To sum up, momentum investing is a way to profit from the general human tendency to extrapolate current trends into the future. It is based on that gap in time before the mean reversion occurs, i.e., before prices become rational again.

In this context, stocks like General Electric Company GE, Royal Caribbean Cruises Ltd. RCL and NVIDIA Corporation NVDA are worth betting on.

Momentum strategies have been known to be alpha-generative over a long period and across market stages. So, this strategy is quite tricky to implement, as detecting these trends is no child’s play.

Here, we have created a strategy to help investors get in on these fast movers and rake in handsome gains. Our screen will help you benefit from both long-term price momentum and a short-term pullback in price.

Screening Parameters

Percentage Change in Price (52 Weeks) = Top #50: This selects the top 50 stocks with the best percentage price change over the last 52 weeks. This parameter ensures we get the best stocks that have appreciated steadily over the past year.

Percentage Change in Price (1 Week) = Bottom #10: From the above 50 stocks, we then choose those that are also among the 10 worst performers over a short one-week period. This parameter picks the ones that have witnessed a short-term pullback in price.

Zacks Rank #1: Stocks sporting a Zacks Rank #1 (Strong Buy) have a proven history of outperformance irrespective of the market conditions.

Momentum Style Score of B or Better: A top Momentum Style Score knocks out a lot of the screening process as it takes into account several factors that include volume change and performance relative to its peers. It indicates when the timing is best to grab a stock and take advantage of its momentum with the highest probability of success. Stocks with a Momentum Score of A or B, when combined with a Zacks Rank #1 or 2 (Buy), handily outperform other stocks.

Current Price greater than $5: The stocks must all be trading at a minimum of $5.

Market Capitalization = Top #3000: We have chosen stocks that are among the top 3000 in terms of market value to ensure the stability of price.

Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that these stocks are easily tradable.

Here are three of the 10 stocks that made it through this screen:

Founded in 1892, General Electric is headquartered in Boston, MA. Its products and services range from jet engines, airframes and energy production solutions to offshore wind turbines, technologies in medical imaging and leasing and financing services, among others. The stock has gained 51.1% in the past year but declined 2.7% in the past week. General Electric has a Momentum Score of A.

Based in Miami and incorporated in 1985, Royal Caribbean is a cruise company. It owns and operates three global brands — Royal Caribbean International, Celebrity Cruises and Azamara Club Cruises. Additionally, it has a 50% investment in a joint venture with TUI AG, which operates the brand TUI Cruises. The stock has appreciated 164% in the past year but lost 4.5% in the past week. Royal Caribbean has a Momentum Score of A.

Santa Clara, CA-based NVIDIA is the worldwide leader in visual computing technologies and the inventor of the graphic processing unit, or GPU. Over the years, the company’s focus has evolved from PC graphics to AI-based solutions that now support high-performance computing, gaming and virtual reality platforms. The stock has rallied 134.4% in the past year but is down 3% in the past week. NVIDIA has a Momentum Score of B.

General Electric Company (GE): Free Stock Analysis Report

Royal Caribbean Cruises Ltd. (RCL): Free Stock Analysis Report

NVIDIA Corporation (NVDA): Free Stock Analysis Report

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