WELLS FARGO: The market's most dominant stocks are in for a rude awakening - here's what traders should buy instead
- For much of the nine-year bull market, investors have been able to chase past performance by buying proven winners - but the technique has come under pressure lately.
- Wells Fargo is forecasting weakness in the strategy going forward, due to high levels of anxiety that have seeped into the market.
- The firm offers alternative investment suggestions for traders willing to heed their advice.
When in doubt, just buy what's been working lately.
It's an investment strategy that may seem overly simplistic, but has actually worked immensely well throughout much of the nine-year bull market. Save for a handful of rough patches, the technique - commonly referred to as momentum trading - has been on an upward ascent as traders have chased past returns.
The party may soon be over, however, at least according to Wells Fargo. The firm is specifically worried about recent weakness in the group, which it says will cause portfolio risk models to "light up" and force investment managers to reduce momentum exposure.
There's also a seasonal factor in play, with end of 2018's first half coming in just four days. That's a crucial bookend for various measures of long-term performance, so investors will be incentivized to take profits or trim portfolios to paint the best possible picture.
If they do exit momentum holdings or roll them into another area of the market, that would add to selling pressure.
So if the market's proven winners are no longer a top option for traders, where else should they look? Wells Fargo says conditions are lining up nicely for so-called risk-off assets, which offer safety during times of turbulence.
For one, their recent underperformance relative to benchmarks make them poised to spring higher, if afforded the proper catalyst. Secondly, the fear creeping into the market - which has manifested itself in the form of a flatter yield curve - sets up risk-off assets for a windfall.
In terms of which specific industries investors should seek out, Wells Fargo recommends utilities and pharmaceutical shares, as well as food, beverage, and tobacco stocks. Overall, the suggestions mark departure from ones made earlier in the year by Wells Fargo, when it said there was no way it'd encourage a shift away from momentum stocks.
The fact that the firm is making such a bold change reflects the degree to which anxiety has seeped into the psyches of investors and Wall Street experts alike. It's safe to say the market is on notice, so stay tuned for more tips around how to battle the chaos.