Are Momentum Stocks Losing their Momentum?

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Are momentum stocks losing their luster?

High flying momentum stocks like Tesla Motors (NasdaqGS:TSLA), Twitter (NYSE:TWTR), and GoPro (NasdaqGS:GPRO) have experienced sharp pullbacks over the past few months. Tesla and Twitter have fallen below their 50-day and 200-day moving average while GoPro now trades below its 50-day moving average. What’s next?

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The iShares MSCI USA Momentum Factor ETF (NYSEARCA:MTUM) is one proxy for large and mid cap U.S. stocks with momentum characteristics like Tesla, Twitter, and GoPro. Despite its recent pullback, MTUM is still outperforming the broader U.S. stock market. (See chart below) Over the past six months, MTUM has gained almost 10% while the Vanguard Total U.S. Stock Market ETF (NYSEARCA:VTI) is ahead by 4.92%. MTUM holds a basket of 125 stocks that are screened for momentum.  Top holdings include Facbook, Johnson & Johnson, and Wells Fargo.

Momentum stocks will typically outperform when the stock market is rising and underperform when it’s falling.

A deeper and prolonged sell off in momentum stocks could be an early warning sign the broader stock market’s appetite for high beta/high risk stocks is waning. It’s also another signal the psychology or sentiment of stock market participants is changing from offensive to defensive.