July’s strong rebound, particularly in the US stock market, may have caught many perma-bears off guard. Smart short-sellers, however, will have taken steps to hedge against this sort of bear market rally. For straightforward buy-and-holders, the question is whether this is indeed just a rally, or the start of a new bull market. In these sorts of situations, momentum investing is very dangerous, there could easily be another powerful downtrend just ahead.
Fortunately, the Alpha momentum screen isn’t just dedicated to tracking share price momentum. The prime purpose of the screen is to look at earnings upgrade and the sentiment based on improvements in fundamentals - i.e., the momentum to analysts’ upgrades. In theory, this makes the criteria more robust as it’s based on confidence in future business performance. However, that might not be enough to avoid losses if there is another strong technical reversal in the direction of markets.
Our UK large cap screen this month reflects optimism for banks - businesses that might be expected to benefit from rising interest rates, which provide scope for them to lend money out at a higher rate and widen their net interest margins. Two notes of caution must be sounded, however. The first is that a recession could cause a spate of loan write-downs next year if it is worse than expected. The second is the souring relations between the west and China over Taiwan, given the significant Asia operations of our screen high rankers HSBC (HSBA) and Standard Chartered (STAN).
Our mid-cap screen is topped by three companies that achieve top marks. The first, specialist healthcare company Mediclinic International (MDC), is subject to a recommended cash acquisition takeover bid. One of the others, Centrica (CNA), has dodged a windfall tax bullet for now but reinstatement of its dividend may raise eyebrows given the political sensitivity of energy companies’ profits. The third, Airtel Africa (AAF) is a long-term play on African mobile communications development.
The top companies on our US screen are all classified as information technology, but aren’t famous big tech names. Enphase Energy (US:ENPH) is involved in energy monitoring software, Monolithic Power Systems (US: MPWR) provides power circuits for cloud computing and other infrastructures.
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