One doesn’t have to be Isaac Newton to realize that when a security goes vertical like some tech and credit card stocks have for almost this entire, extended bull market, they can also go the other way.
Momentum stocks have been experiencing some tough times over the last five weeks. After 10 years of sensational performance, many think they were due for a major correction.
But Jim Cramer of Mad Money fame penned a piece Thursday in which he seems convinced that some of his favorite stocks, notably Amazon, Visa and Mastercard, are trading like “Mexican jumping beans” all because of evil “voyeuristic ETFs” that are “completely hidden.”
So which ETF is the most serious culprit ruining Cramer’s life? It is iShares Edge MSCI USA Momentum Factor ETF (MTUM). Incidentally, I suspect Cramer’s mood is not in a better state this week with the Dow down more than 600 points.
Apparently, MTUM is one of several “totally abusive ETFs out there that really do unlevel the playing field and make a mockery of the whole business,” he wrote.
So who is he calling morons and doofuses? It’s the “moron managers flitting all over the place, the kind Warren Buffett calls out as expensive doofuses,” who are constantly engaging in the risk-on, risk-off trades that always appear to poop on Cramer’s parade. And their current instrument is MTUM.
MTUM may be one of many vehicles raining on the parade, but it’s likely there are many other far more powerful algorithmic strategies making momentum investors miserable. In recent weeks, wizards like AQR’s Cliff Asness have sent apologies to investors talking about their underwhelming investment performance in recent weeks.
On some days quant strategies reportedly account for 50 percent of all trading volume. Some quants may use ETFs but they use many other vehicles as well.
But someone like Cramer, who once was a successful momentum investor himself (he claims to have beaten the S&P 500 by a few basis points in the 1990s), should know better. Momentum apparently has been designated its own asset class by serious academics. That's despite the fact that its underlying definition is simply buying stocks enjoying rapidly rising prices—and then selling them when they stop appreciating—strikes many as a variant of the greater fool theory.
In 1928, Will Rogers articulated this strategy with his typical flair. You buy stocks and they go up. When someone asked him what they should do if equities go down, Rogers replied, "Then you don't buy them."