Join now

The Recent Momentum Selloff

We've seen a significant selloff in Titan stocks recently, driven by a momentum reversal. Here's why, and our take on the path forward.

Over the past few days, we've seen a significant selloff in several Titan stocks. Companies like Twilio, ServiceNow, Visa, and Mastercard have all fallen 5-10%+ from last week's prices.
What gives?
The Selloff Appears to be Momentum-Based
We've seen large algorithmic institutional investors (e.g., quant funds) rotating out of "momentum"-driven stocks and into traditional "value" stocks.
Momentum stocks are stocks that have shown strong recent price strength
Value stocks are stocks that screen cheaply based on quantitative historical metrics like price/earnings ratios
Believe it or not, many quantitative hedge funds invest solely on the basis of certain style factors and signals, without any regard to what the underlying company actually does.
Widgets? Software? Restaurants? Who cares, they say. Let's just look at the stock price.
If the stock price for a company continues to rise day after day, a momentum fund's algorithms pick up that signal as momentum and buy the stock themselves, expecting the price to continue to rise. It's the classic "Greater Fool's Theory," if you're familiar with that idea.
As long as the music keeps playing for momentum stocks, funds that invest with momentum-driven strategies can do extremely well. For much of this year thus far, momentum stocks have performed fantastically well, leaving many momentum funds up 50%+ (more than 3x than return of the S&P 500).
But when the music stops (as it always does), momentum comes to a halt and sharply reverses, inflicting a great deal of short-term pain on momentum stocks and the investors who happen to be invested in stocks with a momentum-driven tilt to their recent stock returns.
Is Titan Driven by Momentum?
We believe momentum has been the primary driver of weakness in Titan stocks over the past few days. However, we do not invest your capital based on momentum trends.
Given that many high-quality, fast-growing companies inevitably catch the attention of institutional investors who invest based on momentum, even the best investors often cannot avoid their stocks being susceptible to momentum reversals.
For example, take a look at some of this year's best-performing Titan stocks. Microsoft (MSFT), Visa (V), Mastercard (MA), and PayPal (PYPL) are some of the most well-known companies around. They dominate tons of ETFs and mutual funds, many of which would not describe themselves as being momentum-based.
And yet momentum is precisely the factor that all of those stocks had in common for most of this year. It's also the factor that's driven their price weakness recently.
Our strategy is based on the highest-conviction holdings of hedge funds that we believe are investing based on fundamentals, not short-term momentum. Over time, momentum's impact wears off vs. the fundamentals.
What's the Path Forward?
Momentum is a funny thing. It's quite recursive in nature: it gets started when a stock's price increases consistently for an extended period of time, and it stops when, well, the price stops going up consistently.
This recursive nature makes momentum incredibly hard to predict in the short term. Furthermore, momentum is far less relevant to long-term stockholders than short-term traders. So we try to diagnose when it may be driving Titan stocks, but we don't react to it or change course when momentum does.
We believe our best path forward is sticking to our strategy and adding to our Titan accounts via auto-deposits. These momentum reversals are painful in the short term, but buying low and selling high isn't supposed to be easy. This is the behavioral edge we have over the machines.
When People Call the "Top"...
You may hear friends or colleagues running for the hills and using this momentum reversal in widely-own tech stocks as justification for a "market top."
Don't let the tail wag the dog. Business fundamentals do not care about momentum reversals. When prices fall for technical reasons but fundamentals remain unchanged -- well, you just got the same business offered at a discount.
Sep. 10th, 2019
Share
Contact us: support@titanvest.com
The statements, opinions and analyses presented herein generally are provided as general information. Opinions, estimates and probabilities expressed in Titan research constitute the judgment of the author as of the date indicated and are subject to change without notice. While all the information prepared in the foregoing articles is believed to be accurate, Titan Invest (“Titan”) makes no express guarantee as to the completeness or accuracy of, nor can it accept any responsibility for errors appearing in, the foregoing articles. Other events which were not taken into account may occur, and any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. The information contained herein is not, and should not be construed as, an offer to sell or the solicitation of an offer to buy any securities. In addition, nothing contained herein is intended to be, nor shall it be construed as, investment advice, nor is it to be relied upon in making any investment or other decision. While Titan is a federally registered investment adviser, the information presented is not part of the personalized, proprietary algorithmic based investment advice provided by Titan to its advisory clients. Rather, the information presented constitutes educational and informational materials meant to better inform market participants, including, without limitation, current and potential advisory clients of Titan. Prior to making any investment decision, you are advised to consult with your broker, investment adviser, or other appropriate tax or financial professional to determine the suitability of any investment. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or investment strategy discussed herein will be profitable or equal any historical performance level(s). Neither Titan, any of its affiliates, nor each of their respective officers, directors, members, agents, representatives, employees, or contractors (collectively, “Titan Parties”), shall be responsible or have any liability for investment decisions based upon, or the results obtained from, the information provided herein. You assume all risks of loss resulting, directly or indirectly, from the use of the information contained in the foregoing articles. By accepting receipt of the foregoing articles you acknowledge and agree to hold harmless the Titan Parties from any and all claims, actions, damages, losses, liabilities, costs and expenses of any kind whatsoever, including but not limited to any claims of negligence, arising out of, resulting from, by reason of, or in connection with the use of the information contained in the foregoing articles. Securities laws impose liabilities under certain circumstances on persons who act in good faith, and therefore no portion of the above shall constitute a waiver or limitation of any rights you may have under any federal or state securities laws.
Certain articles discuss historical performance of a particular issuer over a limited period of time. The historical performance discussed in such articles represents gross performance of the issuer over the limited period of time depicted, and is not indicative of any actual portfolio or investment returns of any account. Any such returns, even if an account was invested in the security discussed over the limited period of time depicted, would be reduced by fees and expenses paid by any such account. The foregoing articles contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results. Comparable companies, strategies, portfolios and indices may be included in the foregoing articles only as a context reflecting general market results during the depicted period or as of the specified date. The comparison of any company, strategy, portfolio or index to a single other company, strategy, portfolio or index may be inappropriate because the relevant assets, strategies and level of risk may vary materially from the comparable company, strategy, portfolio or index as a whole. Titan uses a proprietary algorithmic strategy in selecting recommendations to advisory clients. Issuers and/or securities discussed herein may be, and often are, held by clients of Titan in their investment portfolios. Any single security or issuer identified in herein will not represent all of the securities purchased, sold or recommended for advisory clients of Titan. Please see Titan’s website and Program Brochure for more details on security selection for advisory clients. Before investing, consider your investment objectives as certain investments are not suitable for all investors. Past performance is no guarantee of future results.
Legal
|
Privacy Policy
|
Terms of Use
|
Careers
|
Help Center
© Copyright 2018 Whisker Technologies, Inc. All rights reserved.