Get ahead of the next momentum trade

Momentum trading is nothing new. But it used to be a strategy for sophisticated traders. Moreover, the massive moves of certain stocks and sectors that might be classified as “momentum plays” have attracted retail investors to a relatively new type of ETF’s playing off of these monster momentum moves.

Two of these ETF’s in particular have attracted huge assets. The iShares Edge USA large cap momentum ETF (MTUM-US) is the monster of the group. Its AUM (Assets under Management) is some $13.6 billion dollars. Then there’s the Invesco DWA momentum ETF (PDP-US). This fund trades fast moving mid-capped US stocks. Its currently near $1.7 billion. If you add in the smaller ETF’s like ONEO-US and PTH-US, you are looking at a pretty big chunk of money chasing the momentum plays within stock sectors and individual names. This big-money activity is one of the leading reasons for goofy – overbought stocks getting goofy-er.  Think re-opening stocks like Peloton, Zoom, or equally overpriced stocks like Tesla or clean-energy names last year. The momentum looked like it would never stop on those fast moving overpriced stocks…until it did. The MTUM chart below has been pulling back as its current momentum stock positions have underperformed the broader stock markets.

There are a couple of important things that you and I need to be aware of when it comes to momentum ETF’s. These things have no bearing over whether you choose to own such a security or not. The fact is, these ETF’s have grown large enough to influence stock pricing when they buy and sell stocks or sectors. ETF’s like MTUM tend to rebalance systematically. For example, MTUM is due to rebalance at the end of May. At this time, they are overweight in re-opening stocks, technology, and consumer discretionary stocks. That’s why the chart above shows some recent underperformance. Did you read last Wednesday’s blog on my newest observations surrounding sector rotations? If you didn’t- click here. You need to understand the background of the current rotation to understand why that rotation will accelerate as the momentum ETF’s rebalance. Remember- these funds are not buy and hold. They follow algorithms to move into the current stocks and sectors illustrating strong comparative strength and momentum.

On last Wednesday’s blog, I illustrated how the very sectors that the momentum ETF’s – like MTUM- hold are starting to slow down. These funds don’t react to every little move, so they continue to hold the sectors noted on my blog. But if the comparative strength of technology and discretionary stocks continues to deteriorate, the funds will dump the stocks in those sectors at rebalancing time and buy into the new momentum plays. Its quite obvious that the new momentum plays include cyclicals, financials and industrials. Again, the biggie here is MTUM, and they will be rebalancing on the last day of May.

Consider the money that will leave the tech, solar, stay-inside, discretionary and related stocks when the combined $15 billion dollars ++ moves out of those ETF’s. How is that going to affect the share prices of these former momentum stocks? Hint: probably push them down.

Think of the money that’s going to enter the cyclicals, financials, industrials and value stocks as those ETF algorithms unemotionally rebalance. Their mandate is to hold the current securities with the greatest comparative relative strength and momentum. What’s that going to do to their share prices? Hint: probably push them up.

Some of those moves will be happening in late May. Some will happen sooner than that, depending on the rebalancing schedules of the various momentum ETF’s. Is your portfolio positioned for the next sector rotation? Are you watching the comparative strength charts of the market sectors for insight into these moves?

Its strategic insight like this that gives ValueTrend the edge in todays rotational markets. If you are not staying ahead of the curve with strategic analysis like today’s blog topic…perhaps its time you took a look at ValueTrend. Click here to view our contact options, and arrange a free, no obligation conversation with our staff.



    • SBEA trades in canada I think–very thin, and I think it still looks at global stocks. Im not very familiar with it–I simply googled and it came up–nothing I know of that looks for canadian stocks that are momentum trades–thin pickings methinks

      • First Asset appears to have a few TSX-traded funds :
        – US Momentum Index ETF (YXM.B)
        – Canada Momentum Index ETF (WXM)

        Unknown if/when they rebalance.
        Keith– would these be valid ways to play the rotation you speak of, or wiser to use specific sector etfs (utilities, financials, agriculture, etc)?

        • Andy– I’m a direct stock guy. First, I don’t like that a fund has a “schedule” to rebalance or rotate – I like to do it when the time is right, not waiting for calendar dates to come around.
          But thanks for the CDN momentum etf ideas–this is valuable–if anything, it is good to know their schedule and their holdings to get a jump on them!

  • Hi Keith,

    I’m curious if you buy/sell options in any of your platforms. I’ve always thought buying calls is too risky since you can lose 100‰ of your investment if the underlying stock doesn’t move up enough in the limited time frame until the options exipry, but now I think it could be worthwhile in some situations. For example, buying a call on a technical breakout of a stock that you find maybe to risky to hold outright, but given the potential it may be worthwhile to buy a call because the most you can lose is the option premium (of course you would need to be mindful of position sizing because you can lose 100% fairly easily).



  • How often are the momentum funds commonly rebalance?

    It seems like the more cyclical trade has been going on since November.

    They would’ve really missed the boat

    • Not sure Lance–you might check out their site–I read that the mtum etf is doing a major rebalance end of May in an unrelated report, and the idea struck me for the subject of the blog–ie how that would affect markets. Post your findings if you explore their schedule–thx

  • Hi Keith, Thanks for all the great advice. I decided to toss my morals aside and bought into Altria on the breakout you mentioned might come into fruition in your “profiting in politically incorrect industries”blog the other day. Looking at the charts, I can’t seem to figure out how you came up with $60 as an upside potential. Would you mind explaining your thinking on this one? I read your book “Sideways”, might need to reread it! P.S. Great call on Antero breaking out of a basing formation.

    • Assuming the $50 breakout lasts, the last peak on the old downtrend was $57-ish which will be a point of resistance. Above that is the neckline of the top that formed in 2016-17. That neckline lies close to $60. So the target is between the $57-$60 area. If the neckline breaks, you are looking at $75 to the old highs. These are all stages that must prove one at a time. So for now, its $57, then $60. We shall see from there.


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