A REALLY Bad Time to Chase Momentum

The best illustration I can find to show how bad it's been of late for momentum-chasers is the IBD 100. The highest rated stocks in the 100 are supposed to be the best of the best when it comes to a combination of fundamental and technical strength. When a stock gets completely clobbered- like BIDU has lately- it slides down the list. Or, as in BIDU's case where the stock is already down 30% year to date, poor relative performance can take a stock from #1 on the list a few weeks ago to completely off the list as of now.

I bring up BIDU simply to point out that the top of the IBD list is generally skewed toward stocks that have performed extremely well in the very recent past. With that in mind, you will find below the year to date returns for six of the top ten IBD 100 stocks as of now. Again, these aren't from the top ten as of the beginning of the year. Rather, these are from the top ten as of right now, with laggards such as BIDU already having been purged from the list.

• #1 ISRG -18.9% YTD
• #2 CMG -17.1% YTD
• #4 VIP -18.4% YTD
• #6 CF -15.2% YTD
• #8 SID -11.1% YTD
• #10 ATW -16.4% YTD

It is important to remind the reader that the above losses have occurred in just 13 trading days. The recent performance of these IBD 100 stocks demonstrates, among other things, the importance of religiously using some sort of stop loss system, particularly if you're trading momentum stocks. To me, it also illustrates the importance of keeping an eye on the longer term chart when you're trading momentum stocks. Yes, these stocks have been slaughtered over the past few weeks but they are far from being cheap. Each of these stocks has gained a huge percentage over the past year. Furthermore, each one of these stocks had become extremely extended relative to its 200 day moving average by the end of 2007.

As the old cliche goes, "the bigger they are, the harder they fall." For the year 2007, CF more than quadrupled in value. ISRG, SID and CMG each saw their share price triple for the year ended 12/31/07. ATW and VIP each saw its share price more than double in 2007. When one considers these gains over the past year, it sort of puts the sell-off of recent weeks into perspective. You can make money with these stocks, but you can also lose your shirt if you're not diligent about minimizing your losses and, whenever possible, protecting your gains. There's a big difference between a stock being "cheap" as opposed to just "cheaper than it was". Often, your success as an investor depends on knowing the difference.