Adjustment Nears Its End! Bank of America Recommends Buying US Momentum Stocks on Dips

According to Zhitong Finance APP, Bank of America (BAC.US) trading division recommends that investors buy US momentum stocks on dips, believing that after a round of profit-taking, the sector's valuations have fallen back to attractive levels and are likely to see a rebound in the short term.

The US momentum stock basket compiled by Bank of America has dropped more than 10% in total since its June 25 peak. Previously, investors continued to reduce risk exposure, and quantitative and systematic trading strategies also took profits, resulting in the index posting its second worst July performance in nearly a decade.

However, in a report released last week, Bank of America traders pointed out that, judging from historical experience, the current correction may be nearing its end. Data shows that in the past, whenever the momentum stock basket fell more than 10%, it rebounded by an average of about 5% in the following month.

Bank of America believes that seasonal factors may also serve as catalysts for the sector’s rebound. Over the past ten years, August has been the best month for the US momentum stock basket. Currently, the basket's main holdings include Sandisk (SNDK.US), Micron Technology (MU.US), Danaher (DHR.US), Coinbase (COIN.US), and AMD (AMD.US), among others.

Bank of America traders stated that, based on historical seasonality patterns, the nature of previous momentum corrections, and the risk-reward features after a significant drop, the current trend appears to be a period of continued profit-taking rather than a fundamental market style shift, suggesting the sector may be approaching an inflection point.

The report points out that from a statistical perspective, the current weak performance implies that a good entry point may be coming up in the short term.

Other Wall Street institutions have expressed similar views. Earlier this week, UBS's trading division stated that the decline in momentum stocks may be near its end, and investors can start reallocating to AI and semiconductor sectors.

In terms of specific strategy, Bank of America suggests investors gain exposure to US high momentum indexes or US technology, media, and communications high momentum indexes via total return swaps or August expiry call options.

Bank of America traders also noted that historical data shows momentum stocks typically bottom out in late July during Q3 adjustments, with subsequent rallies often coinciding with the peak of the corporate earnings season.

The report says that if the historical pattern repeats, the market's repricing of momentum stocks will likely become evident gradually around the end of the month.