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The markets have hit the reset button on Momentum.  That’s a nice way of saying momentum stocks have gotten crushed .   If you don’t believe me look at the chart below of  the First Trust Dorsey Wright Focus 5 ETF (FV),  an ETF that gained major traction with the brokerage and adviser community since it launched in early 2014.  The chart shows returns of FV (-22.13% in Red) vs that of the S&P 500 ( -12.48% in Blue) from April 24th 2015 through February 8th 2016 the last 200 trading days:


Pure momentum investing has compelling research in it’s support – we will be one of the first to admit that, but the risks of momentum seem to be overlooked and those risks include sharp pull backs and major draw-downs when the momentum music stops, as seen in the chart above.

As the provider of the Aptus Behavioral Momentum Index, we have been asked  about our methodology throughout the recent volatility in the markets as our index has held up relatively well.  Investment committees specifically want to understand the reason for that and the difference in our methodology vs traditional momentum.   Behavioral Momentum is not Momentum.  We blend traditional momentum with systematic recognition of irrational behavior.  We look for pockets of the market where buyers and sellers are making decisions based on things other than the fundamental data – that’s what we deem as irrational.

The methodology is built for private investors.  We rank our universe and look to own only the highest 25 ranked stocks and revisit our rankings every month to be sure that’s the case.  The behavioral aspect of our ranking system allows for our holdings to adjust to the environment we are in.  In a healthy bull market our stocks tend to look more like traditional momentum, but in a difficult environment we tend to be involved with what’s in favor – no matter what that is, making it hard to put the pure momentum label on our index.   The stickiness of leaders and laggards is a critical component to this: (Here is a cool article on that subject from Dynamic Hedge).

We recognize momentum by itself can get ugly quickly.  Our behavioral element helps manage that risk.  Not to mention, there will be times our Index steps away from stocks altogether in an effort to minimize potential draw-down.

Investment strategies always look good on paper, but do they work in the real world, with real investors and all of the biases and emotions that come with that?  Our index is designed for the real world –  rules based , highly adaptable, and risk managed.  To learn more feel free to visit our Index Page Here.