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Will New Leadership Emerge; Or Will Momentum Stock Come Back

David Becker
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www.iforex.com
Will New Leadership Emerge; Or Will Momentum Stock Come Back

The rotation out of momentum stocks and into value stocks generated a correction that was not felt by the broader market. While the BBH (Market Vectors Bio-tech) declined 24% from late February to late April, the broader S&P 500 index barely felt the pinch. Momentum stocks moved into bear market territory but he slack was made up by a move into value stocks, which increased by nearly 7% relative to the S&P 500 during the same period.

The question for investors is whether the old leaders can reemerge, or will value stocks take the lead during the spring? The bio-tech ETF BBH is beginning to show signs of bottoming. Price action is holding steady near the 200-day moving average. The next level of target resistance for this sector is the 50-day moving average which is nearly 8% higher.

Momentum on the BBH has turned positive, as the MACD (moving average convergence divergence) index generated a buy signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crosses above the 9-day moving average of the spread. The index moved from negative to positive territory confirming the by signal.

The RSI (relative strength index) which is an oscillator that measures overbought and oversold levels, has moved higher from oversold territory which reflects accelerating positive momentum. The RSI is now printing near 48, which is in the middle of the neutral range.

The consolidating in the BBH should be welcome after such a large decline in the first quarter. Investors will likely see the old leaders reemerge. The spread between the BBH and energy stocks has started to move higher which shows that investors are rotating back into momentum stocks, which could make the second quarter a profitable one.

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