These Are the Stocks That Are Working in 2020
Jonas Elmerraji, CMT
"Buy what’s working."
It sounds like simple advice, but the data continue to show that it’s most investors’ best bet for outperforming in high-volatility market environments.
Turns out, owning stocks with positive 6-month cross-sectional momentum in crisis environments boosts your odds of a winning portfolio a month later by about 50%.
How it does it is where things get interesting…
It’s not necessarily that owning what’s working pays you the biggest gains – instead, it steers you clear of the biggest losers. That’s something that becomes more important in “crisis environments” like the one we’re in now.
Looking back at statistically similar market regimes over the last three decades, not owning stocks with negative 6-month relative strength steers you clear of 97% of the names that shed 10% or more in the next month. (More on that here.)
So, what’s working right now?
It probably comes as no surprise that some of the biggest winners are in the tech sector right now.
But what might be a little more surprising is the fact that the distribution of winning stocks across industries is far more uniform than it might first seem.
(On average, consumer discretionary is up just as much as communication services – and more than tech. One thing's for sure: they don't look like cheap stocks. No surprise there.)
Also interesting is how winning stocks have gotten where they are now:
The animation above shows how the stocks that are up year-to-date in 2020 got that way – clearly, it hasn’t been a smooth ride. But it’s a markedly different path from the stocks that aren’t up right now.
Comparing these names against the broader S&P 500, the key difference isn’t that today’s winners have been constantly up much more on average than the rest of their sector groups (of course, some have been) – it’s that they were less red and for less time during the worst of the selling back in March.
Sure enough, the best way to win in 2020 isn't just by making sure you own the biggest winners -- it's also by making sure you don't own the biggest losers.
And the data tells us that the best way to do that for the next month is by owning stocks that are beating the market in a rolling six-month timeframe.