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.
The first chart is the one I’m referring where Momentum Stocks are breaking out relative to the S&P500. This ratio approached the former highs from last year in late May. Since then, we’ve seen a 6-week sideways consolidation that appears to be resolving higher. This is a bullish characteristic, not a bearish one:
If this ratio is above the upper of these two parallel trendlines we need to err on the bullish side of Momentum, particularly compared with the rest of the market.
If you want to look at this from a broader perspective, I find it helpful to compare Momentum stocks to the Russell3000, which represents approximately 98% of all investable assets in the US equities market. This to me has upside resolution written all over it as well.
This is something we’re definitely watching. These Momentum stocks can really have a run here in the summer based on what we’re seeing. I think this bodes well for the overall market as Banks are an integral piece of this index. If Banks are ripping and outperforming the market, I find it difficult to see it taking place within the context of a steep decline for the overall market. I believe that these developments bigger picture are another feather in the hat for the U.S. stock market bulls.