Investors are placing bold bets on tech stocks — this is a very bad idea

While most Americans are concerned about the coronavirus, a group of investors is placing bold bets on the leading sector in the stock market, technology stocks.

For the prudent investor, this is not a good setup. Let’s explore with the help of two charts.

Please click here for an annotated chart of the Dow Jones Industrial Average ETF
US:DIA,
which tracks the Dow Jones Industrial Average
US:DJIA.
For the sake of transparency, this chart was previously published and no changes have been made.

Please click here for a chart showing segmented money flows in 11 popular tech stocks.

Note the following:

• The first chart shows monthly changes. It is easy to discern from the first chart that even after the recent drop in the stock market, the market is still very high from a long-term perspective. All decisions should be made in the context of this chart.

• Even though it is important to be optimistic that the economy will open soon and the coronavirus will be defeated, it is equally important to analyze investments based on potential realistic scenarios that may not be so rosy. Please read “Greed overtakes fear in the stock market, but don’t be lured into this short-lived rally.”

• The second chart shows a rare occurrence in that momentum investor money flows are extremely positive in nine of 11 popular tech stocks.

• Segmented money flows are like an X-ray of stocks — they see under the surface.

• The momentum crowd’s money flows are extremely positive in Facebook stock
US:FB
and Alphabet stock
US:GOOG
US:GOOGL
even though they are losing considerable advertising business.

• The momo crowd is extremely aggressively buying AMD
US:AMD,
Nvidia
US:NVDA
and Microsoft
US:MSFT
because demand for laptops and gaming is rising.

• The momo crowd does not prefer Intel
US:INTC.

• People are staying home — watching more Netflix
US:NFLX
and ordering more groceries from Amazon
US:AMZN
— good reasons to buy. But extremely positive momo crowd money flows are noteworthy.

• Apple
US:AAPL
stores are closed in most of the world but they are now open in China — again, momo money flows are extremely positive.

• The momo crowd’s faith in Tesla
US:TSLA
has not been shaken — momo money flows are extremely positive.

• The only stock the momo crowd is selling is Chinese ecommerce giant Alibaba
US:BABA.
Interestingly, the smart money — professional investors — is buying Alibaba.

• These stocks collectively carry a heavy weighting in the S&P 500 Index
US:SPX.

Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

Contrary indicator

Extremely positive momo crowd money flows indicate very positive sentiment toward technology stocks. Sentiment is a contrary indicator at extremes. In plain English, this means that when sentiment becomes extremely positive, it is time to sell. This is not a good setup.

To be clear, this is not a call to dump technology stocks. Near the peak of the recent rally, The Arora Report did give a signal for tactical, but not strategic, sales for those who were looking to lighten up on the rally. We continue to hold several of these tech stocks in our Model Portfolio.

Some of these stocks should be bought when they dip into the buy zones and nibble when the signals are given to tactically do so.

Investors should consider primarily making buy sell decisions based on the objective framework of protection bands. Please see “Stock market opinions abound — here’s an objective way to tell when the market bottoms.”

Short-squeezes

The chart shows money flow data for short-squeezes in the 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 even slightly good news.

Stock rankings

The chart also shows the relative rankings of the 11 popular tech stocks. These rankings are based on the six screens of our proprietary model.

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.

Answers to your questions

Answers to some of your questions are in my previous writings. You can access them here.

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.

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