The return of meme-stock mania means that retail investors continue to impose their will in the stock market. And while many are new investors, they’re unwittingly chasing a tried-and-true quant strategy: momentum.
It’s as simple as it sounds.
Momentum strategies essentially buy what’s working and stay away from what isn’t. For example, a quant factor could rank stocks based on returns over a trailing 12-month period, and buy the highest-rated companies.
In other words, momentum strategies tend to chase the market’s hottest stocks.
There are even exchange-traded funds (ETFs) that implement quant strategies, such as the iShares MSCI USA Momentum Factor ETF (NYSE: MTUM).
Tesla (Nasdaq: TSLA) is the ETF’s top holding, but there are some other names you may not be expecting, such as mega-cap bank JPMorgan (NYSE: JPM).
But here’s one thing they all have in common: surging prices over the past year.
These rising prices aren’t just the work of retail investors bidding shares higher. Quant funds undoubtedly played a key role in the surge of these stocks as well.
That’s why understanding the quant crowd and their factors can give you a key advantage to raking in profits.
Why Factors Work
The momentum factor is just one example of many, and quite often these factors work because of our own behavioral biases.
FOMO, or the fear of missing out, goes a long way toward explaining why momentum works. Stocks in the midst of strong gains keep surging because greed drives more investors to pile into the shares.
And that’s just one factor. There are hundreds of factors, spanning categories such as quality, volatility and analyst revisions … each meticulously researched and proven by both academics and practitioners alike.
Here’s another reason why they work. There’s over $1 trillion in assets being invested based on these factors.
So just as a particular stock is starting to rank well on a factor, the quant money comes piling in and pushes the share price higher.
How to Leverage Quant Strategies Into Big Profits
Quant strategies used to belong to the exclusive realm of secretive hedge funds that were only accessible by wealthy investors.
But now they’ve become more commonplace, which is a key element behind the surge in assets within these strategies.
In fact, there are a variety of low-cost ETFs where you can access factor investing. But just like a stock, individual factors can be volatile. So, consider an ETF that combines multiple factors as a way to diversify your quant exposure … such as Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (NYSE: GSLC).
But there’s another approach. I’ve designed my own innovative system that pinpoints top-ranked stocks based on the same quant factors used up and down Wall Street.
Except I also overlay my proprietary technical system to pinpoint the arrival of quant flows and leverage options that turn nice gains into huge profits.
I’ll be releasing the details on how you can gain access to this system in just one day, so click here to find out how to get started.
Research Analyst, The Bauman Letter