Many investors rely on the performance of an investment over the past 1, 2 and 3 months (a.k.a. momentum) as a selection tool. In contrast, few market gurus would ever acknowledge the worthiness of this practice.
Does momentum work? Historically, the use of momentum has shown success with traditional mutual funds. However, this success tends to work at the very beginning of new bull markets. (We are 4 years into the current run-up for stocks.)
Nevertheless, with 2007’s infamous 400-point drop in late February, China’s volatility, Japan’s yen "carry trade," sub-prime scares in the U.S., there’s been a reshuffling of the deck. It folllows that examining some of the winners over the last 4- and 8-week intervals respectively may yield some fruit.
iShares MSCI Malaysia Index (EWM) 12.6%, 4.8%
iShares MSCI Brazil Index (EWZ) 11.8%, 6.6%
SPDR S&P Metals and Mining (XME) 11.2%, 12.7%
iShares S&P Latin America (ILF) 10.8%, 4.8%
WisdomTree Internat Materials (DBN) 10.4%, 12.1%
WisdomTree ex-Japan Hi-Yield (DNH) 9.6%, 9.0%
WisdomTree Internat SmallCap (DLS) 7.6%, 6.6%
iShares Global Energy Index (IXC) 7.6%, 4.1%
iShares Dow Jones Utilities (IDU) 7.2%, 7.3%
iShares Dow Jones Materials (IYM) 4.9%, 5.0%
A quick glance of the winners over the last 4 weeks (through 4/5) tells us that emerging regions in Asia and Latin America are still hot. Some of the emerging markets have already reclaimed new highs.
At the same time, many of these investments have significantly lower 8-week returns than 4-week returns. This suggests exceptional volatility and risk… the kind that most do not have the stomach for.
In contrast, those winners with 8-week returns greater than their 4-week returns might suggest less volatility or a more genuine trend; that is, the global community continues to grow rapidly, requiring infrastructure needs from basic utilities (e.g., lights, water, phones, etc.) to basic materials (e.g., copper, chemicals, aluminum, etc.).
No investor should put all of his/her faith in momentum. That said, momentum can confirm or counter a particular investment theme. In this case, momentum appears to confirm that a rapidly growing global economy requires basic commodities, materials and utilities to thrive.
Disclosure statement: Some of Pacific Park’s investment clients may hold positions in any of the investments mentioned above.