The stock market has gained in nine of the past 10 years and is off to another strong start in 2020. Equity investors have been rewarded, but risks remain. Is the stock market’s bullish momentum waning?

With stocks, caution is always in order. This is especially true when it appears stocks are invincible. “It is wise to remember that too much success in the stock market is in itself an excellent warning,” said Gerald Loeb, one of E.F. Hutton’s founding partners.

Let’s examine three aspects of the market to see if the momentum is still to the upside. 

Momentum Stocks

Examining stocks with a momentum bias provides a firsthand view of the bullish epicenter. The iShares Edge MSCI USA Momentum Factor ETF (MTUM) has already gained 7.3% year-to-date and is easily outperforming the total U.S. market by an impressive 3%.

From a technical analysis perspective, MTUM trades safely above both its 50- and 200-day moving averages. So long as it stays above these levels, MTUM’s short-term price action remains bullish.

MTUM concentrates its equity exposure on large- and mid-cap stocks with positive price movement. Stocks are assigned a momentum score which is then multiplied by the company’s market size. Thereafter, the stock’s index exposure within the fund is capped at 5%. MTUM’s top three holdings are Microsoft, Visa and Mastercard.

Sector Momentum

Analyzing industry sector behavior provides us with more insight on the stock market’s general trend.

Among the 11 industry groups within the S&P 500 Index, just two – basic materials and energy – are negative. With the exception of energy, the losses in the Materials Select Sector SPDR ETF (XLB) have been modest and are down just 1.7%.

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