Popular technology stocks have recently staged a rebound. But segmented money flows show the rally is suspect.
Let’s examine the issue with the help of a chart.
Please click here for a chart showing money flows in 11 popular tech stocks. Due to the popularity of these stocks, it makes sense to look at them in addition to Dow Jones Industrial Average
and broad-based ETFs such as S&P 500 ETF
Nasdaq 100 ETF
and small-cap ETF
Please note the following:
• Momo (momentum) crowd money flows are extremely positive in the stock of AMD
and positive in Intel
• Momo crowd money flows are very positive in the stocks of Facebook
• Momo crowd money flows are positive in the stocks of Google
• In addition to Intel, smart money flows are mildly positive in Facebook and Google.
• Smart money flows in Netflix stock are mildly negative.
• Smart money flows in other popular tech stocks are neutral.
The total of the foregoing is that this rally is mostly momentum-driven. The momo crowd buys simply because those stocks are going up.
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The chart shows that short squeeze money flows range from positive to extremely positive in 10 of the 11 popular tech stocks. The momo crowd buying has led to a short squeeze.
In a short squeeze, short sellers are either compelled or feel compelled to buy to cover stock. Buying to cover by short sellers is further exaggerating the moves up.
Short squeezes lead to a lot of artificial buying that is not based on fundamentals.
The chart also shows relative rankings of the 11 popular tech stocks. Those are based on the six screens of the ZYX Change Method. (Please click here to learn about the six screens.)
Risk-adjusted rankings are more useful for medium- and long-term positions. Non-risk-adjusted rankings are more useful for short-term or trade-around positions.
What to do now
During the dip, several tech stocks such as Xilinx
fell in the buy zones given in advance. Now we have several buy zones in place to take advantage of any new dip.
We gave a signal to sell First Trust Dow Jones Internet Index Fund
which contains many popular internet stocks, before the decline. We also gave a signal to short-sell the Nasdaq 100 ETF before the drop, or to buy Nasdaq 100 inverse ETF
for those who could not short-sell. Profits were taken on those positions near the bottom. Now we are just initiating a starter position to establish another short position in the Nasdaq 100 ETF or a long position in the Nasdaq 100 inverse ETF for a short-term trade.
For the long term, we are continuing to hold tech stocks such as Intel, Facebook, Apple, Google and Alibaba in one of our portfolios.
Investors ought to consider sophisticated techniques such as diversification by time frames, diversification by strategies, short-term trade-around positions surrounding long-term core positions, and hedging.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.