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, Amazon, and Netflix.
- Momo crowd money flows are positive in the stocks of Google, Microsoft, Nvidia, Alibaba and Tesla.
- 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.
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.
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
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.