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Greenberg: When Momentum Investing Goes Bad

Thursday, 20 Jan 2011 | 1:43 PM ET

Thursday it’s F5 Networks . Wednesday it was Cree. Last week: Coinstar.

One-day drops of 10 percent, 20 percent—even 50 percent—aren’t uncommon in these (I like to call) high-wire-act names.

If you were ever looking for proof of a momentum-driven market, otherwise known as a lack of conviction in weak hands, these drops prove it.

I asked Factset Research Systems to dig deeper. Here’s what they found.

So far this year—as of Wednesday:

  • 173 stocks fell 10 to 20 percent.
  • 10 fell 20 to 30 percent.
  • 5 fell more than 30 percent.

But the research also confirmed what we suspected: That the better the market's performance, the more and bigger the blowups—especially if the data is broken down on a weekly basis. And during strong rallies, the blowups are more common than during long, bearish stretches.

Big Blowup Warning
As of yesterday, 173 stocks fell 10-20 percent so far this year, reports CNBC's Herb Greenberg.

For example, in last year’s third and fourth quarters, when the S&P 500 returned 11.29 percent and 10.76 percent, respectively, there were 36 and 41 declines of more than 30 percent. By contrast, in the second quarter, when the S&P lost 11.43 percent, there were 30.

With that in mind, these stocks are also on a high wire and can’t afford to disappoint investors: Netflix, VMWare , Salesforce.com , Riverbed Technology and Baidu .

All are priced for perfection and all, certainly on the margin, are in weak hands.

My take: This is the inverse what we see when markets take off—when people buy just because stocks are going up. Rightly or wrongly, this seems to confirm that right now, at least, it's all about the trade. Buyer beware.

Questions? Comments? Write to HerbOnTheStreet@cnbc.com

Follow Herb on Twitter: @herbgreenberg

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CNBC Data Pages:

  Price   Change %Change
S&P 500
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BIDU
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CREE
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CRM
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OUTR
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FDS
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FFIV
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NFLX
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RVBD
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VMW
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