The following is an excerpt from Oliver Renick | July 24, 2016 | Bloomberg.com |
It’s been a great year for catching falling knives.
The buy-the-dip strategy that’s been a hallmark of the U.S. 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 percent, 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 percent drop after Brexit, U.S. 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 $76 billion Hartford Funds Investment Consulting Group in Radnor, Pennsylvania. “We’ve traded in a range the past year and when people see dips they put that cash to work. It’s not an optimal way, but you can definitely generate returns.”
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