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Popular technology stocks are leading the U.S. stock market higher. It seems investors are willing to push up shares even amid signs of a slowdown in global economic growth, mixed earnings reports and the unknown perils of the coronavirus.
A way to understand the strength in those tech stocks is segmented money flows, which are like an X-ray of stocks. Just like a doctor uses an X-ray to see what is going on below the surface, prudent investors can do the same with stocks.
About a month ago I wrote that something rare had just happened in popular tech stocks. Now something even rarer is happening. Let’s explore with the help of a chart.
Mark Hulbert: What money flows and mutual funds really say about the stock market’s future
Please click here for a chart showing segmented money flows in 11 popular tech stocks. Due to the significant outperformance of these stocks, it makes sense to look at them in addition to the Dow Jones Industrial Average DJIA, +0.08% and broad ETFs such as S&P 500 ETF SPY, +0.39%, Nasdaq 100 ETF QQQ, +0.44% and small-cap ETF IWM, +0.84%.
Note the following:
• A month ago I wrote: “The single most important observation from the chart is that, of the 33 money-flow-related data points, not a single one is neutral or negative. This happens only once in a blue moon.” Please see: “Something rare is happening among popular technology stocks.”
• Since then, tech stocks have risen strongly and carried the stock market up with them.
• One of the most notable changes in the last post was that the non-risk-adjusted ranking for Tesla TSLA, +0.32% had moved up to No. 1 from No. 9. Tesla’s stock has exploded since then. Please see: “This is how Tesla ranks compared with other popular technology stocks.”
• As the chart shows, the non-risk-adjusted ranking for Tesla is still No. 1.
• Despite a big move up in Tesla’s stock, smart money flows are mildly positive, momo (momentum) crowd money flows are extremely positive and short-squeeze money flows are also extremely positive.
• The risk-adjusted ranking for Tesla remains in last place, as shown on the chart.
• Money flows show that momo-crowd buying is extremely positive in Microsoft MSFT, -0.88%, AMD AMD, +3.45%, Amazon AMZN, +1.62% and Apple AAPL, +0.23%.
• Money flows show that momo crowd buying is very positive in Facebook FB, -2.52%, Netflix NFLX, +1.23% and Nvidia NVDA, +2.73%.
• As the chart shows, momo crowd money flows are positive in Alibaba BABA, +1.00%, INTC, +1.51% and Google GOOG, +0.63% GOOGL, +0.65%.
• The last occurrence of all 33 data points being positive was rare. Now the data points have become even more positive after a month of strong gains. This is even a rarer occurrence.
• When money flows become extremely positive, paradoxically it is a negative signal. The reason is that, after most of the money that could have flown into tech stocks has already done so, there aren’t many buyers left, and even the slightest bad news can hurt the stocks.
• Consider carefully studying the chart for further guidance.
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The chart shows money flow data for short-squeezes in 11 popular tech stocks.
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.
A trigger for a short squeeze can be just slightly good news.
The chart also shows the relative rankings of the 11 popular tech stocks. These rankings 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.
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.