If you told the average market participant that momentum stocks outperformed this week and are in the process of breaking out relative to the overall market, they would say you’re crazy. But for those of us who ignore the gossip columns and instead focus on price, this should come as no surprise. Sure, some of the mega-cap names have corrected a bit since last month, but they still all fall within the context of much bigger uptrends. The term “Momentum stock”, on the other hand, is thrown around way too lightly, in my opinion. So rather than make up definitions for them, we’ll just use the stocks that make up the MSCI USA Momentum Index (we like to use common sense here). If you compare this index to the S&P500, Momentum names are attempting to break out to new all-time highs.
If you look at the stocks that make up the Momentum Index, you’ll find Banks, Technology and Consumer Discretionaries. JP Morgan and Bank of America represent over 10% of the index between the two of them. Microsoft, Apple and Nvidia are another 12% together. The top 10 represent over 41% of the Momentum Index according to MSCI. These are some really important stocks that have very high positive correlations with the overall market inside of the Momentum Index. This is why I am incredibly interested in what is currently happening in this group of stocks.