In Defense of Momentum Investing

In Defense of Momentum Investing

by Zach Marsh on Oct 1, 2021

Today marked the beginning of not just a new month but a new quarter for financial markets. September, traditionally the worst month for the stock market, delivered returns inline with tradition. For the month the S&P was down over 4.9%, the Nasdaq 100 was down 5.6%, and the small-cap Russell 2000 was down 2.9%. September also brought the 3rd quarter to a close. For the quarter the S&P 500 still managed a gain to eke out a small gain of .65%.

Now we head to the 4th quarter. The S&P is still up nearly 16% for the year, as of the close of business yesterday, and an impressive 88% from March 2020 lows. While much of that impressive performance came on the back of recovering losses sustained during the early pandemic panic, the S&P 500 is still up a whopping 26.5% over pre-pandemic highs. It seems everyone, me included, are waiting for mean reversion to kick in. Stock market gains are not supposed to be a free lunch. The gains received generally come at a cost. Typically, those costs are restless nights, or gut check periods. Times when it seems all we have to do is roll our wheelbarrow in and gather up the cash should, at least, make us a little skeptical.

When I read stories about “wunderkinds” on Reddit “killing” it trading options, my thoughts aren’t how can I do that, rather I think “this isn’t going to end well.” After all the Lord giveth and the Lord taketh away. But euphoria doesn’t seem to die overnight. Last month’s dip, most likely will be seen as an opportunity to buy for the many who have been rewarded in the past for this behavior. I’m not smart enough to discern whether this latest drop is a great entry point for greater gains, or the beginning of a long pain train ahead. I’ll leave that discussion for the analysts on CNBC. The longer I live the less interest I have in analysis, read prediction, of a yet to be experienced future. I’ve been wrong enough times making predictions to surrender to the reality that I’m not clairvoyant.

Clairvoyance is an exercise of our ego—and man do we know how to feed that beast. It seems you can’t go two minutes watching a sporting event without being bombarded by a gambling ad. If that doesn’t tell you how addicted, as a society, we’ve become to ego-driven guessing I don’t know what else will. The old poker player yarn states, “If you can’t tell within five minutes of sitting at the table who the dumbest player is, then you’re it.” When a gambling ad tells me “MGM is the place where winning players play,” I know enough to be suspicious that no one opens a business up to give away money. After all they aren’t the government.

If you are wondering if I’m comparing the rise of sport’s gambling with the illusion of free money in the stock market, stop wondering. I’ve read enough about the history of bubbles to know that euphoria in society finds multiple outlets at the same time. Money seems to be the cheapest commodity in town these days. The flip side of a bull market in financial assets is a bear market in cash. Given the rapid rise of inflation indicators, it is becoming painfully clear that cash is becoming less and less valuable. Cash can become figuratively, and perhaps literally, trash.

Looking over the history of bubbles, and their ultimate demise, it seems they end much the way Hemmingway declared one goes bankrupt: “Two ways. Gradually, then suddenly.”  Bubbles tend to burst at the realization that “buying the dip” no longer works. That realization happens only by experiencing loss. The pain of loss then leads to the reflex of, in market parlance, “puking out” of your position. The simultaneous retching is the final stage: the sudden part of the equation. But for now, the music still plays, and the dance continues.

Momentum investing sometimes gets a bad rap from the value players. After all, we prefer paying higher and higher prices—we don’t realize, “price is what you pay value is what you get.” However, we also don’t believe in getting in the way of a freight train. Freight trains run in both directions, and I prefer avoiding both a northbound and a southbound train. I don’t know how or when this party ends, but I know it does. And if it ends gradually, then suddenly I would rather be a momentum investor than a dip buyer.

 

Thanks for reading,

Zach and Dave

 

 

 

   Disclosures

All opinions are subject to change without notice. Neither the information provided, nor any opinion expressed, constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.  Tax laws are complex and subject to change. Calibrate Wealth LLC, does not provide tax or legal advice respect to the services or activities described herein except as otherwise provided in writing by Calibrate Wealth. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.

 

This material does not provide individually tailored investment advice. It has been prepared without

regard to the individual financial circumstances and objectives of persons who receive it. The strategies

and/or investments discussed in this material may not be suitable for all investors. Calibrate Wealth

recommends that investors independently evaluate particular investments and

strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a

particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of

factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii)

governmental programs and policies, (iii) national and international political and economic events, war

and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities

and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other

disruptions due to various factors, including lack of liquidity, participation of speculators and

government intervention.

 

Foreign currencies may have significant price movements, even within the same day, and any currency

held in an account may lose value against other currencies. Foreign currency exchanges depend on the

relative values of two different currencies and are therefore subject to the risk of fluctuations caused by

a variety of economic and political factors in each of the two relevant countries, as well as global

pressures. These risks include national debt levels, trade deficits and balance of payments, domestic and

foreign interest rates and inflation, global, regional or national political and economic events, monetary

policies of governments and possible government intervention in the currency markets, or other

markets.