For investors looking for profits amid the choppy market, one technician has a simple solution: Stick with the winners.
While Oppenheimer technical analyst Ari Wald believes stocks are “oversold,” he said Monday that “you still want to be selective, because the overall market environment is cracked, and I think the choppy behavior can continue.”
Specifically, Wald would recommend looking to so-called “momentum” stocks, or names that have done well over the past year. One way for investors to do that is to buy the iShares Momentum ETF (MTUM), whose top five holdings are Facebook, Amazon, Home Depot,Starbucks and Visa.
The ETF’s gains relative to the S&P 500 have reached new highs, Wald said, which is a bullish sign for momentum stocks to continue their uptrend.
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“Relative to the market, it’s breaking out,” he said on CNBC’s “Trading Nation” “It should hold up better in this ebbing and flowing over the next few weeks, and ultimately lead a resumption of the market’s advance come the second half of the year.”
Looking back to 1990, Wald said momentum stocks have a history of outperforming, which suggests that the strength momentum stocks saw in 2015 isn’t an exceptional occurrence.
“Since 1990, this index has averaged a 13 percent annualized return versus a 7 percent [return] for the S&P 500, simply by buying the stocks with the best risk-adjusted return,” he said.
However, Erin Gibbs of S&P Investment Advisory warns that buying momentum stocks may take a strong stomach.
“We don’t typically recommend a lot of the momentum strategies because they tend to come with much higher volatility,” she said. “But overall, you do see a lot of momentum strategies offer higher returns over certain periods of time, and there definitely is momentum out there.”