BREAKING DOWN THE MOMENTUM BREAKDOWN

most investors who only follow the S&P 500 (SPY) would assume that it has been a relatively quiet month. The S&P 500 is currently flat in March and the high to low range in the index during the month is a very calm 2.7%. In fact, this is the lowest intra-month range in the S&P 500 since January 2007, and the lowest since the current Bull Market began in March 2009 (see table below).

Beneath this calm exterior, however, there is massive reversal going within the high momentum group. Momentum stocks, as illustrated by the Momentum Factor ETF (MTUM), had been strong outperformers on the year heading into March. From the start of the month, though, we have seen a complete reversal and more in this relative strength with momentum stocks now underperforming the S&P 500 (see top panel of chart below). We are also seeing sustained weakness in two of the strongest groups within the high momentum sphere: the Biotechs (XBI) and the Social Media (SOCL) names (see 2nd and 3rd panels of the chart below).

On an absolute basis, the decline has accelerated over the past two weeks. A number of top momentum names that were exploding higher from the start of the year through mid-March have declined between 10-20% over the past two weeks. The most prominent names in this group include Tesla (TSLA), Illumina (ILMN), Trip Advisor (TRIP), Facebook (FB), Regeneron (REGN), Netflix (NFLX), Biogen (BIIB), and Priceline (PCLN). All of these names are in either the Consumer Discretionary or Health Care sectors, with a concentration in Biotech and Internet groups (see table below).

Conversely, the momentum names that have outperformed since the middle of March tend to be more defensive in nature. Some well-known names in this group include Tyson Foods (TSN), Johnson & Johnson (JNJ), Hormel Foods (HRL), Berkshire Hathaway (BRK/B), and Kroger (KR).

This defensive behavior within the momentum universe is consistent with what we are observing in the broader market, with the Consumer Discretionary Sector (XLY) showing significant weakness relative to the Consumer Staples Sector (XLP) during the month of March. On a year-to-date basis, the more defensive Staples sector is outperforming the more cyclical Discretionary sector by over 4%.

Overall, it remains to be seen if this momentum reversal is merely a short-term pullback or is an early indication of a larger correction to come in the broader markets. At the very least, investors would be wise to look beyond the calm in the broad markets in March and pay closer attention to these names in the coming weeks. This is particularly true as it has been almost two years since the S&P 500 has suffered a 10% correction and momentum reversals have a history of occurring near market turning points.