NEW YORK: It's been a great year for catching falling knives.
The buy-the-dip strategy that's been a hallmark of the US stock rally is outdoing itself in 2016, where buying stocks in the most extreme state of free fall is paying like rarely before. An index tracking shares in the Russell 3000 Index that register as “oversold” on a momentum metric is up 28%, according to data compiled by Bloomberg.
The durability of strategies focusing on momentum reversals is a gift to traders who’ve been otherwise hamstrung in a market that just spent 13 months going nowhere before breaking to a new high earlier in July. From the 11 percent decline in first two months of the year to the 5.3% drop after Brexit, US companies have been quick to shake off losses tied to the economy, earnings and global turmoil.
“We’ve gone from an investor's market to a trader's market, so you basically have to sit there and rely on technicals,” said Tom Siomades, head of US$76bil Hartford Funds Investment Consulting Group in Radnor, Pennsylvania. This year has been especially ripe for betting on share price recoveries, as deep, prolonged selling at the start of the year and a sharp plunge after the UK referendum sent a wide swath of the stock market plunging.
An investing strategy of buying Russell 3000 companies trading at an RSI under 30, and resets the basket every week to remove those no longer meeting the criteria, returned 28% this year. The basket gained 18% by April 20 and another 12% points in the wake of the Brexit vote.
The strategy, which is purely hypothetical and omits trading costs, captures companies from just about every corner of the stock market, a testament to the widespread nature by which investors abandoned equities this year.
And while the universe of companies is diverse, the timing needed to articulate such a strategy would be tricky.
Kinder Morgan Inc, for example, slid to US$12.95 a share and an RSI of 26.9 on January 13.
Two weeks later, the stock emerged from “oversold” status after climbing to US$14.22, a 9.8% advance. Genworth Financial Inc., down 29% in the two weeks after Brexit, saw its RSI drop below 30 on July 5. The shares then climbed 17% in the next week before moving back above 30.
“When there is a lot of doubt during crises you buy weakness not sell weakness,” Michael Block, chief strategist at Rhino Trading Partners LLC in New York, said by phone. – Bloomberg
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