Markets

3 High Momentum Stocks & ETFs for the Santa Rally

A note book and a piece of paper.
Credit: Shutterstock photo

A consensus carried out from 1950 to 2013 has revealed that December has ended up offering positive returns in 49 years and negative returns in 16 years, with an average return of 1.59%, as per moneychimp.com , the best in a year.

But U.S. stocks have defied the seasonal trend this time around. The first Fed rate hike in almost a decade and possibilities of four more hikes next year along with horribly low oil prices might make Christmas a little dull this year, curbing the natural progression of the end-of-season ascent, commonly known as the Santa Clause rally.

What is Santa Rally?

Santa Claus rally refers to the jump in stock prices in the week between Christmas and New Year's Day. There are several reasons behind this surge including 'tax considerations, happiness around Wall Street, people investing their Christmas bonuses and the fact that the pessimists are usually on vacation this week' as per investopedia .

In fact, some even believe that investors buy stocks during this period to cash in on another strong equity event, known as the January Effect, which takes place soon after. As per the 2016 Stock Trader's Almanac, in the last 45 holiday seasons, the Santa Claus rally has delivered positive returns 34 times with the average cumulative return being 1.4%.

If we go a little deeper, the consistency of this rally would be more visible. The Dow Jones Industrial Average has returned about 1.7% (on an average) since 1896. However, the Santa Claus rally failed to live up to investors' expectation several times including in 1990, 1999, 2004, 2007, and 2014, per Business Insider .

Will 2015 See a Santa Rally?

With just three days to go for Christmas, there are hardly any indications of such a surge. Global stocks were at great health last week with the S&P 500 recording its ' best week since October 24, 2014'. But stocks lost their steam at the start of this week. All in all, the situation is shaky but thanks to compelling valuation (after the latest sell-off), one can't ignore the prospect of a Santa rally this year as well (read: Winning ETF Strategies for Q4 ).

Currently, the U.S. economy appears to be the lone star in a tottering global backdrop. This fact, along with compelling valuation brings about bright opportunities for some U.S.-based momentum stocks and ETFs in the coming days, especially in a market rebound.

After all, no storm lasts forever. Thus, momentum investing might be an intriguing idea for those seeking higher returns in a short spell. Momentum investing looks to reflect profits from buying stocks which are sizzling on the market (read: Beat the Market with Momentum ETFs ).

Below we highlight three momentum stocks and ETFs to watch out for in the coming trading sessions.

Stock Picks

For stocks, we have chosen top picks using the Zacks Screener that fits our three criteria: momentum score of 'A', stock Zacks Rank #1 (Strong Buy) and positive estimate revision for the current quarter. Here are the three recommended stocks.

American Eagle Outfitters Inc. (AEO)

Based in Pennsylvania, this retailer of apparel and accessories has delivered an average positive earnings surprise of 16.7% over the trailing four quarters. The consensus estimate for the current quarter has risen from 40 cents to 42 cents per share in the last 30 days as six analysts raised their forecast while just one cut its estimate. Along with Momentum score of 'A', the stock also has a Growth and Value score of 'A'. This Zacks Rank #1 stock is up 8.9% so far this year (as of December 21, 2015).

B&G Foods Inc. (BGS)

The company makes and markets packed and easy-to-store food and household products. Its products basket carries hot cereals, fruit spreads, canned meats and beans and many more. B&G has a Zacks Rank #1 and is up over 16.6% so far this year. The stock currently has a solid Zacks Industry Rank in the top 37%. The consensus estimate for the current quarter has risen from 42 cents to 44 cents per share .

Caesars Entertainment Corporation (CZR)

The Nevada-based company offers casino-entertainment and hospitality services in the U.S. and abroad. The stock currently has a Value score of 'A' and the solid Zacks Industry Rank in the top 15%. In the last 30 days, its projection of losses contracted from 27 cents to 14 cents. No analyst cut their estimate in the last 7, 30 and 60 days period, though there were positive revisions. Though this Zacks Rank #1 and high-momentum stock is down 50.9% so far this year, it added over 4.3% in the last one month.

ETF Picks

iShares MSCI USA Momentum Factor ETF ( MTUM)

This ETF seeks to track the performance of large- and mid-cap U.S. stocks exhibiting relatively higher momentum characteristics. The fund has attracted about $1.1 billion is assets so far. With an expense ratio of just 15 basis points, this is one of the cheapest options in the high momentum ETFs space.

The ETF is tilted toward the Consumer Discretionary and Information Technology sectors. Each of these takes over 25% of the basket. The next two spots are occupied by Consumer Staples and Health Care, each with double-digit weight. Amazon is currently the top holding of the fund, with Facebook, Home Depot, Visa and Starbucks rounding out the top five. MTUM is up 7.2% so far this year but lost 1.3% in the last one month, though lesser than SPY (down over 3.5%) (read: Are These Momentum ETFs Better Bets than SPY? ).

SPDR Russell 1000 Momentum Focus ETF (ONEO)

This new ETF has amassed about $325.8 million in assets in less than a month. The fund looks to track the performance of a segment of large-capitalization U.S. equity securities demonstrating a combination of core factors with a focus factor comprising high momentum characteristics.

This 918-stock ETF is heavy on Consumer Discretionary (20.05%) followed by financial services (16.84%) and producer durables (16.37%). The fund charges 20 bps in fees and added about 3% in the last five trading sessions (as of December 21, 2015).

First Trust Dorsey Wright Focus 5 ETF ( FV)

This ETF hovers around technical indicators such as relative strength. The fund is designed to indentify the five First Trust sectors and industry-based ETFs that are arguably expected to have the maximum chance of outperforming the other ETFs in the selection universe. Securities with high relative strength scores (strong momentum) are given higher weights (read: 5 ETFs for a Retirement Portfolio ).

Currently, the fund has the highest exposure to the ETF following Biotech, Internet and Health Care. The fund has already managed to attract more than $4.56 billion in assets. It is a slightly expensive choice thanks to its "enhanced indexing" approach, with an expense ratio of 94 basis points. The fund is up 5.7% so far this year.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

ISHRS-MSCI US M (MTUM): ETF Research Reports

SPDR-R1000 MF (ONEO): ETF Research Reports

FT-DORSEY WFFF (FV): ETF Research Reports

B&G FOODS CL-A (BGS): Free Stock Analysis Report

CAESARS ENTERTN (CZR): Free Stock Analysis Report

AMER EAGLE OUTF (AEO): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

MTUM BGS FV ONEO

Other Topics

ETFs

Latest Markets Videos

    Zacks

    Zacks is the leading investment research firm focusing on stock research, analysis and recommendations. In 1978, our founder discovered the power of earnings estimate revisions to enable profitable investment decisions. Today, that discovery is still the heart of the Zacks Rank. A wealth of resources for individual investors is available at www.zacks.com.

    Learn More