An inflection point for the winning momentum trade is near, says top technical analyst

Jonathan Krinsky, chief market technician at BTIG, notes that momentum has been the dominant play this year, performing particularly strongly of late, and he warns that the trade is likely nearing an inflection point.

Simply put, it looks a bit overdone. The GS High Beta Momentum Long Index, which as the name suggests tracks stocks with a positive momentum — currently many tech favorites — and which tend to rise more than the underlying market, is up 14% so far in 2024, says Krinsky.

In contrast the GS High Beta Momentum Short Index is down 7% over that period. The pair together, as shown in the chart below, have seen a 30-day rate-of-change of plus 19%. The potential problem is that the last time the pair saw a move that big was in November 2022, and it marked a short-term inflection point for the market, says Krinsky.

To emphasize just how stretched the momentum trade is now, we can look at the iShares Edge MSCI USA Momentum Factor ETF
MTUM,
which is 26.5% above its 200-day moving average — near its widest difference in a decade. The ETF’s 14-day relative strength index is 79.5, well above the overbought threshold of 70.

“This is not a call on the overall market, but we are likely nearing an inflection in momentum, where high-momentum falls, low-momentum rallies, or both,” says Krinsky

What could cause this? Keep an eye on the U.S. consumer price index data released on Tuesday, “which could be a catalyst for the unwind,” says Krinksy.

Economists are forecasting that the annual headline CPI inflation rate will fall below 3% for the first time in nearly three years. Easing inflation that allows the Federal Reserve to reduce borrowing costs later in the year have helped propel the equity rally, so a higher than expected CPI number may give stock bulls the jitters.

Still, it may be possible for a momentum unwind to occur just because the the trade looks too rich.

And if that’s the case then it should benefit small-caps broadly which have clearly lagged, says Krinsky. Small-cap growth looks like it’s trying to break out of a near two-year range. He is also keeping an eye on “overlooked mid-caps, which are very close to breaking out and testing their all-time highs from 2021.”

Stocks whose charts look constructive and have high short interest as a percentage of their float, and which are therefore on Krinsky’s radar, include Academy Sports & Outdoors
ASO,
+2.52%,
Camping World
CWH,
+3.59%,
ETSY
ETSY,
+4.83%
and Sonic Automotive
SAH,
+3.71%.

Markets

U.S. stock-index futures
ES00,
+0.01%

YM00,
-0.08%

NQ00,
+0.03%
are mildly mixed as benchmark Treasury yields
BX:TMUBMUSD10Y
trade little changed. The dollar
DXY
is a touch firmer, while oil prices
CL.1,
-0.95%
slip and gold
GC00,
-0.12%
trades around $2,020 an ounce.

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The buzz

Diamondback Energy
FANG,
-1.13%
has agreed to buy shale rival Endeavor Energy Resources for around $25 billion.

Company results due after Monday’s closing bell include Arista Networks
ANET,
+2.38%,
Waste Management
WM,
-0.33%
and Cadence Design System
CDNS,
+1.49%.

The New York Fed will release its survey of consumer expectations for January at 11 a.m. Eastern. The monthly U.S. federal budget for January will be published at 2 p.m.

Fed Governor Michelle Bowman will speak at 9:20 a.m. and Minneapolis Fed President Neel Kashkari will make comments at 1 p.m.

Markets including Japan, China, Hong Kong, Taiwan, Singapore, and South Korea were shut for holidays on Monday.

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