High relative strength stocks have always had the potential to gap down just as they may gap up. High momentum is sometimes joined by high volatility. I have observed several changes in trend behavior and volatility since the 2007 to 2009 bear market. One of them has been an increased level of individual volatility, especially on top ranked momentum stocks. Volatility is how much or how quickly the range of prices spread out and volatility is non-directional. A stock that loses -10% in a week may be considered volatile, but so is one that gains 10%. It’s the downside volatility we are concerned about. When stocks tend to gap down more, it makes it difficult to extract more profits than losses. I could show some sophisticated quantitative studies illustrating what I mean, but instead I’ll just show a very simple observation.
As you can see below, the popular stock indexes are down this morning an average of -.67%.
Below are the top 10 stocks of the IBD 50, a proprietary list of the 50 top-ranked companies published every Monday in Investor’s Business Daily. Companies are ranked based on superior earnings, strong price performance, and leadership within their respective industries. These top 10 stocks are down an average of -1.71% with two of the stocks down over -6% and the one that gained over 3% isn’t enough to help While strong momentum stocks have always had times when volatility cuts the other way, we’ve seen it more the last several years.