Use short-term rallies to boost high-momentum stock exposure, Wells Fargo says

Oct. 05, 2022 8:15 AM ETSPDR S&P 500 Trust ETF (SPY)CNP, ED, SO, SRE, ATO, XLU, XLE, XLV, XLB, XLF, XLI, XLK, XLP, XLY, DG, APA, OXY, OMC, VRTX, EA, ADP, AZO, DVN, PGR, LLY, LMT, NOC, ADM, MRO, ON, CI, DLTR, ORLY, HSY, IRM, CAH, GWW, JKHY, GIS, MTB, MCK, PSA, PFG, LYV, EXR, SJM, MOS, AJG, WRB, GPC, TMUS, FMC, ALB, CF, ANET, ATVI, NLSN, HII, ENPH, MPC, XLRE, LW, VICI, XLC, CTVABy: Kim Khan, SA News Editor25 Comments

Two Balls Moving On The Ribbons

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The Fed's continual downplaying of capital market signals as it looks to tamp down inflation will only add to market dislocations, according to the Wells Fargo equity team.

"We believe the Fed is not properly assessing the effects its message is having on investor psychology," equity analyst Chris Harvey wrote in a note.

And capital market signals "will need to get louder (i.e. even lower equities and wider spreads) before the Fed reacts," Harvey said. "This also implies the recession likely will be longer/more severe than current fundamentals and market risk indicate."

"From a portfolio perspective, we believe one of the best solutions is to increase exposure to long-term price Momentum factors, which have a history of outperformance during periods of stress," he said.

"Long-term Momentum typically outperforms in stressful times by keeping investors away from adverse stock situations. In simplest terms, it is a 'chart-looks-good/bad' market. Last year we became more constructive on Momentum strategies, and now it is time to re-emphasize the three-pronged message: (1) do not go bottom fishing; (2) shake broken stocks from the portfolio; and (3) add long-term momentum exposure."

The stocks in the Wells Fargo High-Momentum Portfolio (all weighted 1.82%) by sector are (alphabetically):

  • Communication Services (XLC)
  1. Activision Blizzard (ATVI)
  2. Electronic Arts (EA)
  3. Live Nation (LYV)
  4. Omnicom Group (OMC)
  5. T-Mobile (TMUS)
  • Consumer Discretionary (XLY)
  1. AutoZone (AZO)
  2. Dollar General (DG)
  3. Dollar Tree (DLTR)
  4. Genuine Parts (GPC)
  5. O'Reilly Automotive (ORLY)
  • Consumer Staples (XLP)
  1. Archer-Daniels (ADM)
  2. General Mills (GIS)
  3. Hershey (HSY)
  4. Lamb Weston (LW)
  5. J.M. Smucker (SJM)
  1. APA (APA)
  2. Devon Energy (DVN)
  3. Marathon Petroleum (MPC)
  4. Marathon Oil (MRO)
  5. Occidental Petroleum (OXY)
  • Financials (XLF)
  1. Arthur J. Gallagher (AJG)
  2. M&T Bank (MTB)
  3. Principal Financial (PFG)
  4. Progressive (PGR)
  5. W.R. Berkley (WRB)
  • Healthcare (XLV)
  1. Cardinal Health (CAH)
  2. Cigna (CI)
  3. Eli Lilly (LLY)
  4. McKesson (MCK)
  5. Vertex Pharma (VRTX)
  • Industrials (XLI)
  1. W.W. Grainger (GWW)
  2. Huntington Ingalls (HII)
  3. Lockheed Martin (LMT)
  4. Nielsen (NLSN)
  5. Northrop Grumman (NOC)
  • Info Tech (XLK)
  1. ADP (ADP)
  2. Arista Networks (ANET)
  3. Enphase Energy (ENPH)
  4. Jack Henry (JKHY)
  5. On Semiconductor (ON)
  • Materials (XLB)
  1. Albemarle (ALB)
  2. CF Industries (CF)
  3. Corteva (CTVA)
  4. FMC (FMC)
  5. Mosaic (MOS)
  1. Duke Realty (DRE)
  2. Extra Space Storage (EXR)
  3. Iron Mountain (IRM)
  4. Public Storage (PSA)
  5. VICI Properties (VICI)
  • Utilities (XLU)
  1. Atmos Energy (ATO)
  2. Centerpoint Energy (CNP)
  3. Con Ed (ED)
  4. Southern (SO)
  5. Sempra Energy (SRE)

Screen for stocks with strong momentum.

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