While most Americans are concerned about the coronavirus, a group of investors are placing bold bets on the leading stock market, technology stocks.
For the prudent investor, this is not a good configuration. Let’s explore using two graphs.
Please click here for an annotated chart of the Dow Jones Industrial Average ETF
following the Dow Jones industrial average
For the sake of transparency, this table was previously published and no changes have been made.
Please click here for a graph showing the cash flows segmented into 11 popular technology stocks.
Note the following:
• The first graph shows the monthly changes. It is easy to discern from the first graph that even after the recent stock market downturn, the market is still very high from a long-term perspective. All decisions must be made in the context of this table.
• While it is important to be optimistic about the upcoming opening of the economy and the defeat of the coronavirus, it is equally important to analyze the investments according to potential realistic scenarios which may not be not as optimistic. Please read “Greed exceeds fear in the stock market, but don’t get caught up in this short rally.”
• The second graph shows a rare occurrence in which investor cash flows are extremely positive in nine of the 11 popular technology stocks.
• Segmented cash flows are like an x-ray of stocks – they see below the surface.
• Crowd money flows are extremely positive in the Facebook stock
even if they lose considerable advertising activity.
because the demand for laptops and games is increasing.
• The momo crowd doesn’t prefer Intel
• People stay at home – watch more Netflix
and order more groceries on Amazon
– good reasons to buy. But momo’s extremely positive capital flows are noteworthy.
stores are closed in most parts of the world, but are now open in China – again, momo cash flow is extremely positive.
• The momo crowd’s faith in Tesla
hasn’t been shaken – momo’s money flows are extremely positive.
• The only stock the momo crowd sells is the Chinese e-commerce giant Alibaba
Interestingly, smart money – professional investors – buys Alibaba.
• These stocks collectively have a strong weighting in the S&P 500 index
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The extremely positive cash flows from the momo crowd indicate a very positive feeling towards technology stocks. Sentiment is an indicator that goes against extremes. Clearly, this means that when the sentiment becomes extremely positive, it is time to sell. It is not a good configuration.
To be clear, this is not a call to dump technological stocks. Near the peak of the recent rally, the Arora report gave a signal for tactical, but not strategic, sales for those looking to unwind on the rally. We continue to hold several of these technology stocks in our model portfolio.
Some of these securities should be bought when they dive into the buy zones and snack when the signals are given to do so tactically.
Investors should mainly consider making buy-sell decisions based on the objective framework of protective tapes. Please see “Stock Market Opinion Abounds – Here’s an Objective Way to Know When the Market is Low.”
The chart shows the cash flow data for short presses on the 11 popular tech stocks.
Short-term compression occurs when short sellers panic or are forced to buy to cover stocks that were previously sold short. This leads to many artificial purchases that are not based on the fundamentals.
A trigger for short compression can even be very good news.
Stock market rankings
The graph also shows the relative ranking of the 11 popular technology stocks. These rankings are based on the six screens of our proprietary model.
Risk-adjusted rankings are most useful for medium and long term positions. Unadjusted risk-based rankings are more useful for short-term positions or trading.
Answers to your questions
The answers to some of your questions can be found in my previous writings. You can access it here.
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 a trained investor, engineer and nuclear physicist who founded two fastest growing Inc. companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be contacted at [email protected]