The Momentum Stock Crash Puts These ETFs in Focus - ETF News And Commentary

After a huge rally in 2013, momentum stocks lost some steam in 2014. The reversal can be traced back to worries over valuations, bubble fears, a pack of discouraging U.S. economic indicators in the beginning of the year, a brutal winter, geo-political concerns, slowdown in China, continued QE tapering in the U.S. and the possibility of a short-term rate hike in mid next year.

If these were not enough, the latest subdued U.S. job report signaled sluggish economic recovery dragging down high momentum or high flying stocks last Friday. Most of these stocks belong to the tech and biotech sectors listed on the Nasdaq index which tumbled

in Friday's session. In fact, the Nasdaq saw its worst session since

in Friday trading (read:

).

Focusing on momentum plays is an investment strategy that calls for the expected continuation of an existing trend. It means that a momentum investor believes that increasing prices of a security will be pursued by added gains or vice versa thus resulting in huge investments in top performers or sharp sell-offs in poor performers.

Analysts identified excessive valuation as a culprit of these high flying tech stocks' slump. As per

, price-to-earnings ratios for some high momentum stocks are much more than the broader market.

For example, Facebook's P/E is 92.8, Netflix P/E is 182.2 and LinkedIn's P/E is

over the trailing 12-month period, while P/E for the S&P 500 is

. Thus, a sharp correction in these tech stocks seemed inevitable this year.

may be another reason for these sharp sell-offs. Expectations for the Q1 earnings season as whole remain muted, with total earnings expected to be down -2.6% from the same period last year on 1.0% higher revenues and modestly lower margins.

On top of all of this, as following the trend for over a year, estimates for Q1 fell sharply during the quarter. For instance, the current projection of 2.6% decline in total earnings in Q1 is actually tapered from 2.1% growth projected in January.

Out of some notable sectors, Finance, Technology, Energy, Medical and Basic Materials are expected to witness earnings declines. This indicates why the market is due for a sharp correction before the earnings season (read:

).

The terrible trading in the Nasdaq momentum stocks also sent momentum ETFs into red on the day. In particular, the

(

), the

, the

and the

shed about 2.50% last Friday, while the

was off about 3.68% (read:

).

It is just matter of time and valuation. There is a high chance that the high-flying space will rebound once the earnings season passes, some tech stocks come up with big surprises and the U.S. and global markets divulge some hopeful economic numbers (read:

.

Even in this gloomy world backdrop, S&P 500 earnings are expected grow 7.8% in 2014 (year over year) and 11.7% next year. These numbers are not bad at all. Revenues will expand 1.3% in 2014 and 2.0% in 2015 as per the

.

While investing in a single stock that promises higher price appreciation is definitely an option, the basket form is surely a safer and easy choice. So investors interested in using the dip as a buying opportunity and making money out of it later, can try out the aforementioned momentum ETFs. After all, slow or fast, whatever be the pace, the U.S. economy is surely on the rise.

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