Momentum's Dominant Even As Biotech Turns

This is an abridged version of our Daily Report.

Momentum is enjoying its turn

The highest momentum stocks have nearly doubled the gains in the S&P 500 over the past year. That’s among their best relative performance in 20 years.

If we zoom out and look at the past 90 years, there were periods with much relative returns in momentum stocks. Many of those outstanding periods for momentum occurred when coming out of extended downtrends. When occurring after years of a bull market, stampedes into momentum stocks led to below-average returns.

Biotech got burned

After a spectacular 2017 and early 2018, leading to excellent gains and new highs, biotech stocks were among the largest losers on Tuesday, following a new high last week.

Similar reversals led to volatile returns, with a modest negative bias in the short-term, less so long-term.

Whoa, Nellie

Small options traders spent 40% of their volume buying speculative call options last week, the most since 2011. Since the 2009 bottom, there have been 5 other weeks with this much enthusiasm. According to the Backtest Engine, two weeks later the S&P was lower each time by an average of 1%.

Rejected

Stocks were on track for one of the largest negative reversals in years on Tuesday. While one-day reversals have a sketchy predictive record, the one being carved out in the S&P had led to consistent weakness, but a late recovery alleviated many of the most negative precedents.

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