Can't Buy Me Love is a movie from the 1980s about a nerd who is desperate to improve his social status. In so doing, he makes an investment. He hires the most popular girl in school to be his girlfriend for a few weeks, believing this will permanently elevate his standing with the popular clique at his high school.

The plan works, kind of.

Dating head cheerleader Cindy Mancini does catapult Ronald Miller’s social status, but the good times don't last.  Later in the film, Ronald's plan to gain artificial popularity unravels. His new friends quickly dump him, and he becomes a social pariah.

Herding, heat-chasing—whatever you want to call it—is common in both high school hallways and on trading floors.

Every investment cycle sees popular cliques emerge. Sectors or styles that rise above the rest. The so-called “it” places to put your money.

When a stock or sector catches fire, it exhibits positive relative momentum, which attracts more capital. The positive feedback loop makes sense in the beginning. Eventually, bubbles form.

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Today, passive mutual funds and exchange-traded funds (ETFs) comprise roughly 42% of all U.S. stock fund assets—a big jump from just 24% in 2010, and a mere 12% in 2000.

As passive investing has grown more popular, new sub-categories have been introduced, including "smart-beta" ETFs. These products are a hybrid between traditional passive and active strategies.

The ETFs are built to capture returns from specific fundamental factors, shown by academic researchers to possess historical return premiums. Smart-beta strategies surpassed $1 trillion in assets last year, according to Morningstar, and comprise roughly 18% share of the overall ETF market.

For individual stocks, the equivalent of a "varsity jacket" in factor circles these days is inclusion in momentum funds. Momentum ETFs vary in portfolio construction methodology, but the common thread throughout is an overweight in stocks with strong performance trends. "Popular stocks" you might say.

The graph below shows how the momentum factor has dramatically outperformed since 2017.

Positive momentum for the momentum factor has attracted more capital to the ETFs that track it. Below is a table showing organic growth rates across the major smart-beta categories in 2018.  Momentum tops the list (source: Bloomberg Intelligence). 

According to Investopedia, herd behavior is "the tendency for an individual to mimic the actions of a larger group, whether those actions are rational or irrational."

People do irrational things all the time in the name of social conformity. From my perch, I see this type of behavior transpiring in the market now. To prudently risk manage the climate, you may want to avoid the following individual stocks. They are the most owned names across 12 broad momentum ETFs (source: Bloomberg).

• Abiomed (ABMD)
• Adobe Systems (ADBE)
• Align Technology (ALGN)
• Amazon (AMZN)
• Boeing (BA)
• Estee Lauder (EL)
• IPG Photonics (IPGP)
• Micron Tech (MU)
• Old Dominion Freight (ODFL)

Why worry about these stocks? 

Consider it: ‘The Ronald Miller Index.’

Ronald got an artificial popularity boost from dating Cindy. After she dumped him, others soon followed. It was a harsh reversal. Even Ronald’s nerdy friends were loath to associate with him.

I don’t expect the above stocks to permanently crater. But I do expect an overshoot to the downside when they face their next substantive correction. These names are littered with artificial demand driven by fast money sheep who buy green and sell red.

Moreover, even though I respect the merits of the momentum factor over the long-term, it now seems stretched. Factors mean revert just like everything else in markets. If that weren’t the case, everyone would overweight the best factor, and its excess return potential would vanish.

Predicting precisely when the momentum train will stall is anyone’s guess. Luckily, such crystal balls aren’t necessary to navigate this momentum-driven market.

At the end of Can’t Buy Me Love, Ronald rides off into the sunset on a lawnmower with Cindy at his side. We don’t know how or where they end up, but we know he won her back by being his authentic self.

As an investor riding into the sunset of this cycle, it’s important to periodically sanity check your portfolio. Make sure the assets you own are attractive based on their true intrinsic worth, not propped up by the heat-chasing proclivities of the crowd.

Money can’t buy love, and momentum can’t buy permanent alpha.

Originally published by Forbes. Reprinted with permission. 

This material is not intended to be relied upon as a forecast, research or investment advice. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by Silverlight Asset Management LLC to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Silverlight Asset Management LLC, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.​