Prudent investors pay attention to money flows because that gives them an edge.
Professionals already know they are competing with the best and the brightest on Wall Street and seek every edge they can get. However, sometimes the average investor forgets that simple fact. Just like a doctor cannot see everything with the naked eye and may order an X-ray to figure out what is going on, segmented money flows are like X-rays of stocks. Let’s explore the issue with the help of a chart.
Please click here for a chart showing segmented money flows in 11 popular tech stocks. Since tech stocks are the market leaders, it makes sense to look at the money flows in those in addition to the Dow Jones Industrial Average DJIA, -0.26% and broad ETFs such as S&P 500 ETF SPY, -0.54%, Nasdaq 100 ETF QQQ, -1.24% and small-cap ETF IWM, -0.80%.
Note the following:
• There is an unusual change in money flows in Amazon AMZN, -0.83% stock. Until recently, the momo crowd money flows in Amazon were very positive. Now they have turned mildly negative.
• Until recently, smart money flows in Amazon were neutral but now they have turned negative.
• The unusual change in momo crowd money flows in Amazon has not yet shown up in the Amazon stock price. Investors ought to look at it as an early warning signal. Money flows can change on a dime. At The Arora Report we will be carefully monitoring any changes.
• The Arora Report gave a sell and short-sell signal on Netflix NFLX, -0.09% when the stock was at $380. And most of Wall Street was highly bullish. Netflix stock is trading at $264 as of this writing, $116 lower from the signal to short-sell. In short-selling, an investor profits when the stock price falls. We have a highly sophisticated system for giving signals based on the six screens of the ZYX Change Method, but suffice to say that part of the reason for the signal was negative smart money flows in Netflix stock.
• As Netflix stock fell, the momo crowd kept on buying it, perhaps based on hope that history would repeat itself. In the past, it was common for Netflix to stage sharp rebounds.
• The big change is that momo crowd money flows in Netflix stock have finally turned mildly negative. In plain English, this means that the momo crowd is finally crying “uncle” and booking large losses. Hope is never a good strategy in investing and trading in the stock market.
• There is also a big change in Apple AAPL, -0.49% stock. Previously, momo crowd money flows have been very positive in Apple stock. Now they have turned neutral.
• Momo crowd money flows are extremely positive in AMD AMD, -2.54%.
• The chart shows momo crowd money flows are very positive in Microsoft MSFT, -1.30%.
• As the chart shows, momo crowd money flows are mildly positive in Tesla TSLA, -0.18% but smart money flows are neutral.
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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. 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.
The chart lists AMD, Nvidia, Netflix and Tesla as extremely positive for a short squeeze. This means that those four stocks can quickly spike up a lot if a short squeeze starts. Often the trigger for a short squeeze is good news, even if it’s only slightly good.
What to do now
At this time, we are not making any changes in our long-term portfolios. However, we are on high alert to monitor not only money flows but several other factors. We may start short-term trades if these trends continue. Investors ought to pay attention to Arora’s 18th Law of Investing and Trading: Diversifying by time frames provides a consistent stream of profits.
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.