The short squeeze that, in part, propelled popular tech stocks higher this year is over. Thus, prudent investors should pay attention to the dichotomy that is developing now.
The dichotomy is the interesting contrast between smart money flows and momo (momentum) crowd money flows. Money flows represent the final actions based on various fundamental, technical, quantitative, macro and sentiment factors. For this reason, money flows represent an easy shortcut to start an analysis. Money flows are especially important if you own or want to buy popular tech stocks. Letâs explore with the help of a chart.
Please click here for a chart showing segmented money flows in 11 popular tech stocks. Due to the popularity of these stocks, it makes sense to look at them in addition to the 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:
â¢ The smart money prefers Intel
In contrast, the momo crowd prefers AMD over Intel.
â¢ The smart money prefers Alibaba
In contrast, the momo crowd prefers Amazon over Alibaba.
â¢ The smart money prefers Alphabet, aka Google,
In contrast, the momo crowd prefers Apple over Google.
have the distinction of being admired by both the smart money and momo crowds.
â¢ The smart money is mildly negative on Netflix
perhaps because of the upcoming streaming offerings from the likes of Disney
â¢ The momo crowd is usually positive on Tesla
but has now turned neutral.
â¢ The momo crowd continues to stay positive on Nvidia
but the smart money is neutral.
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The chart also shows the relative rankings of the 11 popular tech stocks. The rankings 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.
A short squeeze occurs when short sellers either panic or are compelled to buy to cover shares that were previously short sold. This leads to a lot of artificial buying that is not based on fundamentals.
Late last year, popular tech stocks were aggressively sold short. As the market rose this year, a short squeeze occurred. According to the algorithms at The Arora Report, the short squeeze is now over. More important than what has happened is what may happen in the future. This is where the data shown on the chart comes in. Under the short-squeeze column is the positioning for further short squeezes if the market continues to rise. For example, AMD short-squeeze flows are extremely positive but they are neutral in Intel. This means that on even slightly good news, AMD can experience a significant spike up because of the short squeeze. In contrast, there is no such potential artificial buying ahead in Intel.
What to do now
Based on the data shown, with the exception of nimble very short-term traders, investors may want to slow new buying in popular tech stocks and wait for a pullback.
Consider continuing to hold long-term core positions. However, if holding more than the core position size or trade-around positions, consider taking at least partial profits.
Under the present market conditions, it is especially important for tech stock investors to pay attention to Aroraâs 14th Law of Investing and Trading: To be successful at investing and trading, become a master of position sizing.
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.