This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Riding on Momentum

NEW YORK ( ETF Expert) -- Recently, in "What Apple Can Teach ETF Investors About Performance Chasing," I addressed a familiar market phenomenon. Specifically, the larger the momentum-based price appreciation, the more pronounced the fall from grace.

There is also a tendency for the opposite to hold true. In fact, the essence of value-based investing is to acquire massively beaten-down shares of "good companies" and allow for the inevitable recovery of sanity.

Right now, though, most do not care as much about the dominant theme that transfixes markets at a given point in time. Few non-professional investors care whether it is the greed of performance-chasing that is succeeding or the "buy fear" approach that value-oriented money managers use to profit. Most just want to know what works today.

I provided a glimpse of the probable answer in the aforementioned column. I wrote:

Assuming the government gets its act together (enough so that there are no more cliffs/crises/showdowns in 2013), pay extra close attention to the best-performing sectors. If they are the same groups (e.g., biotech, "new tech," small-cap growth, etc.), you'll know that the investment community returned to momentum-based performance chasing. In contrast, if the hottest areas struggle in spite of a debt agreement, a rotation into "risk-sort-of-on" assets might be transpiring.

The market activity following a proposal to raise the debt ceiling for six weeks -- a proposition that is meant to buy time for a larger and more substantive agreement on both the budget as well as borrowing limitations -- demonstrated that momentum-based investing is still the most popular. Specifically, the previous five days witnessed an exodus from many of the biggest price appreciators of 2013:

The Biggest Winners In 2013 Had Been Getting Slammed The Hardest...
10/2-10/9
State Street Biotech (XBI) -12.4%
PowerShares NASDAQ Internet (PNQI) -7.2%
Global X Social Media (SOCL) -7.1%
PowerShares Small Cap Technical (DWAS) -6.2%
Guggenheim Global Solar (TAN) -5.1%
S&P 500 SPDR Trust (SPY) -2.1%

Then leaders in the U.S. Congress along with the White House showed signs that they "might" be able to negotiate a six-week agreement. Six weeks to squabble some more! Rather than look at circumstances as a continuation of uncertainty, stocks rocketed the most in a single day than they had on nearly any other during the year. Equally worth of note, investors did not rotate into slightly less risky holdings; rather, they coveted the riskiest momentum gainers once more.

The Biggest Winners In 2013 Bounced Back The Most
1st Half of Trading (10/10)
State Street Biotech (XBI) 4.3%
PowerShares NASDAQ Internet (PNQI) 3.2%
Global X Social Media (SOCL) 3.5%
PowerShares Small Cap Technical (DWAS) 3.1%
Guggenheim Global Solar (TAN) 5.4%
S&P 500 SPDR Trust (SPY) 1.6%

Simply stated, the dynamics do not appear to be changing. Earnings growth, revenue and the economy as a whole have not particularly mattered in 2013. Instead, there is a generalized belief that the Federal Reserve (and now Janet Yellen) will prevent most threats from derailing "progress." Tapering or no tapering, rates will remain low enough to benefit American consumers, U.S. businesses, multinationals and foreign entities. That means, short of U.S. leadership posturing and/or systemic shocks abroad, aggressive U.S. equity investing may see few hiccups in the short to intermediate term.

Nevertheless, my primary mandate as the president of my Registered Investment Adviser is to reduce risk while simultaneously pursuing annualized returns that are consistent with client goals. Therefore, I do not get overly "wowed" by the flood of social media IPOs or the promise of the monster biotech boom.

Instead, I seek reasonable risk-reward profit in those assets that may benefit from larger themes. Is it fair to say that "old tech" benefits from "new tech" superstar growth? Then one should consider First Trust Nasdaq Technology Dividend (TDIV) with its attractive 2.6% yield, enormous cash on the collective books as well as attractive P/E ratio.

If the creation of a new drug and its approval can double the biotech company's share price overnight, if investing in the producers of life-altering medications is a speculative way to go after the aging population, is it reasonable to assume that "Big Pharma" will perform without as much speculation? I think so. Consider Market Vectors Pharmaceuticals (PPH) as a potential holding for your portfolio.

Courtesy of StockCharts.com

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

Gary Gordon reads:

Real Clear Markets
Jeff Miller
indexuniverse
Charles Kirk
On Twitter, Gary Gordon follows:

Jonathan Hoenig
Doug Kass
Hard Assets Investor

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,279.74 +13.75 0.08%
S&P 500 2,010.40 -0.96 -0.05%
NASDAQ 4,579.7890 -13.6380 -0.30%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs