The momo (momentum) crowd followed the stock market higher from support to resistance, ignoring President Trump on the trade war.
Now the momo crowd is finding that Trump is aiming to win the trade war. Following the momentum and ignoring the risks of the trade war is not a prudent strategy.
Think twice before following the momo crowd if you are a prudent investor. The momo crowd often gets whipsawed. Let us examine with a chart.
Read: How to avoid a trade war: Just walk away
Chart
Please click here for an annotated chart of S&P 500 ETF
SPY, -0.73%
Similar conclusions can be drawn from the charts of Dow Jones Industrial Average
DJIA, -0.88%
Nasdaq 100 ETF
QQQ, -0.51%
and small-cap ETF
IWM, -0.85%
Please observe the following from the chart:
• The chart shows the trend line that has acted as support three times.
• The chart shows the resistance that has previously stopped the stock market advance three times, excluding this attempt.
• The chart shows the momo crowd buying ahead of the $16 billion of tariffs going into effect.
• The chart shows the momo crowd buying when the tariffs were actually imposed and on the jobs report. The jobs report was better than the consensus numbers but in line with the whisper numbers.
• The chart shows round-robin buying. In round-robin buying, stocks in Asia were bought because stocks in the U.S. were up. Stocks in Europe were bought because stocks in Asia were up. Subsequently, stocks in the U.S. were bought because stocks in Europe and Asia were up. Yes, this sounds silly, but that is what the momo crowd often does.
• From the chart, please note that the momo crowd ran up the stocks from support to resistance.
• The chart shows new tariffs coming into the picture as the Trump administration releases a list of goods worth $200 billion for new tariffs on Chinese goods.
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Favorite stocks
The momo crowd has been buying the indexes, S&P 500
SPX, -0.71%
Nasdaq 100
NDX, -0.53%
and Russell 2000
RUT, -0.71%
and their favorite technology stocks such as Amazon
AMZN, +0.68%
Facebook
FB, -0.49%
and Netflix
NFLX, +0.73%
There has been sporadic buying in bank stocks such as Bank of America
BAC, -0.52%
Citigroup
C, -0.47%
and J.P. Morgan
JPM, -0.22%
For the most part, the momo crowd has ignored a majority of other good stocks.
Be careful of talking heads
Prudent investors ought to be especially careful of talking heads regarding the trade war. Most of the talking heads seem to have a simple formula. The formula is to look at the market momentum and justify it after the fact. This way, they appear to be always right.
What to do now
Investors ought to follow a proven model that is not mostly momentum-based and has a long record of success over bull and bear markets. In addition to stocks and ETFs to buy, The Arora Report provides its subscribers with cash levels and hedges to hold based on the proven ZYX Global Allocation Model with inputs in 10 categories. Please click here to see the 10 categories of input. At this time, the model is bullish but advocates for defensive measures due to the risks that are present now. Investors may want to be highly selective at this time, and not blindly invest in indexes or chase momentum.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. 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.
Source : MTV
