Here’s a conundrum for you:
Is it possible to be both a contrarian investor and a momentum investor at the same time?
Contrarian investors go after stocks that nobody else likes, or buy when everyone else is selling. They act contrary to the trend hoping for a reversal.
Momentum investors jump on stocks that are already moving higher and ride the wave, or continue investing in a strong market when others try to predict a top. They invest with the trend, not against it.
It doesn’t seem possible to be both, but right now I would say I am a “momentum contrarian” investor – or a “contrarian momentum” investor if you prefer.
I admit there aren’t a lot of us around, and it has felt a little lonely at times. But it’s working, and that’s what matters.
It can work for you, too. You just need to follow the data and the money.
Sentiment vs. Data
Stocks have enjoyed a nice 2023 so far, with the S&P 500 gaining 4.5% in the first two months of the year. At that pace, we’d be in for a 27% jump – more than double an average year.
But – there’s always a “but” – investors remain highly skittish after last year’s bumps and bruises. Plus, the benchmark has dipped more than 4% in less than a month.
Last week was the worst for stocks so far this year.
Headlines continue to scream about inflation, interest rates, war, and other scary stuff.
According to the latest Sentiment Survey from the American Association of Individual Investors, only 21.6% of investors are bullish.
I didn’t take the survey, but I would be in that somewhat lonely number. When 82% of investors are not bullish, that makes me a contrarian.
I am bullish for qualitative and quantitative reasons.
Take the biggest concern – inflation. The data can wiggle around month to month, but the Consumer Price Index clearly shows inflation peaked last June. And while the Federal Reserve continues to raise interest rates, the central bank lowered the last hike to a quarter-percentage point, the smallest since last March. Fed Chair Jerome Powell has also changed his language a bit to at least hint that we may be getting close to the end of rate hikes.
And through it all, the economy remains resilient. It’s taken a hit, but it’s a necessary hit to slow inflation. And so far the medicine seems to be working with only moderate side effects.
I said last fall that 2023 would end up being a good year for stocks, and the data and my analysis since then make me even more confident now.
And then there’s Big Money.
The Big Lesson from Big Money
If the Fed is overdoing it with interest rates and the economy is heading toward a recession, Big Money hasn’t gotten the memo.
One big advantage of our Quantum Edge system is our ability to track heavy-duty buying and selling. We can see it in the overall market. We can see it in the sectors. And we can see it in individual stocks.
This is where the momentum part comes in.
When Big Money flows into markets, sectors, or stocks, it tends to continue surging higher longer than anyone expects – certainly longer than those who try to predict “tops” think it will.
And where exactly is the money flowing now? A look at the sectors is highly revealing.
Through the first two months of the year, the strongest sectors are Discretionary, Technology, Materials, and Industrials. These are growth sectors leading the charge, even as the market hits the pause button.
Notice, too, the bottom of the rankings – especially Utilities and Health Care. These are the defensive sectors that we would expect Big Money to flow into if fund managers were preparing their portfolios for a recession.
The momentum is contrary to the headlines.
The Leader of the Pack
The strongest stock in the strongest sector right now is a familiar brand – Crocs (CROX) – maker of those odd-looking rubbery but extremely comfortable shoes. They’re not cheap… and consumers would not be buying them up if they were cutting back on their spending.
CROX has a fantastic Quantum Score of 86.2 over the first two months of the year, making it the highest-rated Discretionary stock in my system. (The Quantum Score is my proprietary number for ranking stocks.) Its fundamentals currently rate a strong 79.2, with good sales-and-earnings growth, solid profit margins, and a decent valuation even with the stock’s nearly 50% run over the past 12 months.
With that kind of performance, it’s no wonder the stocks’ technicals are also strong at 79.2. Its sluggishness over the last month is the only negative – if you can even call it that. I view it more as setting up for a buying opportunity.
And you can see that Big Money has made its presence known on multiple occasions (the green barsin the chart below) over the last six months. That’s a good indicator of more to come.
CROX is on my watchlist of stocks that could become my next recommendation in my Quantum Edge Pro service. It’s become a long watchlist – 40 stocks at the moment. The strong market has helped boost the overall Quantum Scores, which is great. At the same time, we don’t want to overpay for stocks, so we are monitoring for pullbacks that bring these highly ranked potential buys back into our target zone. (I expect we’ll make our move any day now.)
So, yes, you really can be a momentum contrarian – or vice versa. In fact, you should be. We’ve locked in partial profits ranging from 33% to 41% in the first two months of the year following this approach, and more buying opportunities are on the way.
It’s not about being a curmudgeon. It’s about following the data and the Big Money to the best stocks in the market.