3 breakout sectors for momentum investors

Thursday, Nov 01 2012 by
3 breakout sectors for momentum investors

London markets have enjoyed a rocky but undeniable mini bull run since early June, with the FTSE 100 now a good 600 points ahead of where it was five months ago. While many investors are understandably wary of reading too much into short term market movements like these, it's still worth tracking which companies and sectors have been benefitting from the advance. 

Tracking individual companies that are displaying strong relative price strength in the market and perhaps even trading at (or close to) their 52 week highs has been shown to be a useful buy or sell indicator. The momentum concept was originally observed in a 1993 paper by Jegadeesh and Titman, and you can read more about the phenomenon here. In recent weeks we have looked at various shares that are enjoying strong price strength, including housebuilders, oil companies and bargain Piotroski stocks and why they could still have further to run. 

Sector momentum rocks 

While it's worth monitoring which stocks that are racing ahead of the pack, a powerful twist on the concept of momentum (and arguably an even  more successful trading strategy) is to look at which sectors are leading the momentum charge. This was the focus of an influential 1999 study by Moskowitz and Grinblatt, which found that industry momentum investment strategies, which buy stocks from past winning industries and sell stocks from past losing industries, can be highly profitable. Moreover, they found that industry momentum almost always subsumes individual stock momentum – meaning that once you control for industry momentum, regular stock momentum is much less important. 

It was a similar story in a 2011 study by Hong, Jordan and Liu, which found that a trading strategy using the 52-week high effect (where stocks at or near their 1-year price highs often go on to trade higher) was considerably enhanced by focusing on sectors rather than individual stocks. 

So how can investors use these findings in practice? At Stockopedia we track the 52 week high screen and among the most interesting patterns that emerges from the 50-strong universe of companies are the hot sectors on the move. Not only does this screen give you a feel for the industries that are in favour among investors but the stock breakdown reveals the types of companies that are leading the pack in each one. Right now, consumer cyclicals, financials and industrials make up the lion’s share of qualifying stocks. 

1. Consumer cyclicals 

Despite their vulnerability to economic conditions and consumer confidence, consumer cyclicals such as pub groups and retailers have performed robustly this year. Commentators on both sides of the Atlantic have pointed to decent growth rates and reasonably strong dividend yields as reasons why investors have remained keen on these types of stocks. 

Among the big retailers, Mothercare (LON:MTC), Marks and Spencer (LON:MKS) and Next (LON:NXT) all currently qualify for the 52-week high screen. Mothercare is the best performer, helped in no small part by an upbeat trading update in October, which signalled that efforts to breathe life into sales could be paying off. At the smaller end, PR group Next Fifteen Communications (LON:NFC) had been among the steepest risers but that performance was slashed on news of a “complex fraud” in its Bite North America business. Elsewhere, newspaper distributor Smiths (LON:SMIN) and restaurant operator Restaurant (LON:RTN) also make the list. 

2. Financials 

Banks were blitzed in the 2008/09 economic meltdown and most have yet to make up the lost ground. Despite reputations and share prices lying in tatters, financial stocks have nevertheless been on the move of late. Big banks are largely absent from the 52 week high screen, with better performances recorded by some of the smaller players. Arbuthnot Banking (LON:ARBB) has been on a strong run since the turn of the year, when it opened at 338p. It currently trades at 646p as investor have continued to warm to an ongoing overhaul of its operations, including a stronger emphasis on its retail banking business. Consumer credit and motor finance business S and U (LON:SUS) appears on the list, as do investment banking firms Numis (LON:NUM) and Brewin Dolphin Holdings (LON:BRW). 

3. Industrials 

Economic uncertainty has had a mixed impact on London listed industrials groups. Weak activity and uncertainty surrounding the Euro Zone haven’t helped, but the companies on the 52 week high screen are obviously doing well despite this. The largest of the industrials to make it on to the 52 week high screen is precision engineering company Renishaw (LON:RSW), which has seen its shares jump by 327p to 1770p in five months. Elsewhere, a handful of other FTSE 250 stocks also appear, including Speedy Hire (LON:SDY) and De La Rue (LON:DLAR), plus the notable AIM-quoted performer Judges Scientific (LON:JDG). In the case of scientific instrument maker Judges, the shares have actually been on a steady upward trend since mid-2009. A couple of acquisitions and another year of record results have provided extra impetus, driving the shares from 656p to 862p since May. 

What does it all mean? 

So how do these findings tally with wider thinking in the market? Matt Hudson, whose Cazenove UK Equity Income fund is among the top performing institutional growth funds so far in 2012 is heavily focused on consumer cyclicals, financials and industrials. In his latest note to investors, Hudson said financials and consumer cyclicals remained the core focus for his new investments and while industrials looked vulnerable in the short term, the UK market overall still offers “a range of attractively valued opportunities and with well covered yields and with real growth”. 

Given the volatility in the market, anyone watching the 52 week high screen will see quite a lot of movement of stocks in and out on a daily basis. Amidst that flurry of names, it's well worth keeping a close eye on the sectors which crop up again and again  – most recently, that's been consumer cyclicals, financials and industrials. How is your portfolio positioned with respect to those sectors? The research suggests that playing the momentum effect is as much about sector weighting as anything else. 


Filed Under: Momentum Investing,

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.

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Mothercare plc is a United Kingdom-based retailer for parents and young children. The principal activity of the Company is to operate as a specialist multi-channel retailer, franchisor and wholesaler of products for mothers-to-be, babies and children under the Mothercare and Early Learning Centre (ELC) brands. The Company's operating segments include the UK business and the International business. The UK business segment includes the United Kingdom store and wholesale operations, catalogue and Web sales. The International business segment includes franchise and wholesale revenues outside the United Kingdom. Its clothing and footwear product includes ranges for babies, children and maternity wear, home and travel includes pushchairs, car seats, furniture, bedding, feeding and bathing equipment, and toys are mainly for babies. It operates in the United Kingdom through its stores and direct business, and across the globe in approximately 60 countries through its franchise network. more »

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Marks and Spencer Group plc is a retailer in the United Kingdom. The Company is the holding company of the Marks & Spencer Group of companies. The Company operates through five segments: M&S for Business, M&S Bank, M&S Energy, M&S Outlet and M&S TV to provide the services of Christmas Shopping, Style & Living, Women, Lingerie, Beauty, Men, Kids, Home, Food & Wine, Flowers & Gifts, Outlets, Television, Energy and M&S Bank. It offers clothing and home products, as well as foods, sourced from around 2,000 suppliers globally. The Company has over 798 stores across the United Kingdom in high streets and retail parks, as well as stations, airports and other locations ranging from out-of-town and flagship stores of over 100,000 square feet, to Simply Food stores of around 7,000 square feet. The Company has over 455 international stores in 54 territories across Europe. more »

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Next Plc is a United Kingdom-based retailer offering clothing, footwear, accessories and home products. The Company's segments include NEXT Retail, a chain of over more than 500 stores in the United Kingdom and Eire; NEXT Directory, an online and catalogue shopping business with over four million active customers and international Websites serving approximately 70 countries; NEXT International Retail, with almost 200 mainly franchised stores; NEXT Sourcing, which designs, sources and buys NEXT branded products; Lipsy, which designs and sells Lipsy branded younger women's fashion products, and Property Management, which holds properties and property leases which are sub-let to other segments and external parties. Lipsy also sells directly through its own stores, Website, to wholesale customers and to franchise partners. The Company's franchise partners operate around 188 stores in 37 countries. more »

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About Ben Hobson

Ben Hobson

Strategies Editor at Stockopedia. Writer, Editor & Investment Strategies Analysis. Test driving and telling the world about the awesome stock market investing tools and resources at Stockopedia. Helping Stockopedia subscribers take control, invest with confidence, beat the market and sleep soundly at night. more »


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