Momentum Monday – A Bit Frothy

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Don’t ignore industry relative strength. It is among if not the most powerful catalyst for short to medium-term moves in the stock market. Just take a look at the solar stocks in the past 4-5 months. So many of them tripled or even quintupled in the second half of 2020 and they continue to be hot and provide great swing trading opportunities on a monthly basis. It happened again in the past couple of weeks when many solar stocks bounced from their 20 or 50-day moving averages. Once an industry trend is established, it tends to persist for a long time. Look at other examples from this year – electric vehicles and parts, electric charging stations, fuel cells, lidar sensors for autonomous cars, online gambling and e-sports, gene editing, etc. It is not an accident that so many recent IPOs and SPACs have been in exactly those industries. When Wall Street smells a good story with unlimited demand, it makes sure to oversupply the market (feed the ducks). Eventually, it will matter and those trends will reverse but before that, some of those stocks can and have already gone up 5-10x. Our job as market participants is not to complain about the faults of the system but to find solutions – recognize trends and extract money from them.

Besides the hot action in clean energy and select biotechs, we are starting to see more signs of froth – SPACs sky-rocketing to absurd valuations without even knowing the company that they will merge with. Just 10-15 years ago, SPACs were looked down upon as a vehicle to bring public unremarkable private companies. Nowadays, they are the most popular way to get public.  We are also seeing quite a few stocks that doubled in 4-6 weeks, double again after a brief consolidation (the so-called high-tight flags which are supposed to be a rare bull market formation are showing up all over the place and more importantly, they are mostly delivering). In the meantime, there has been an increase in reversals after technical breakouts. All of these are signs of a typical topping behavior but I would not short this market. It’s just too strong. The more likely scenario is that this hubris and FOMO (fear of missing out) will be resolved via another set of sector rotations. We just need to be paying attention where. Homebuilders and building material stocks are starting to set up again. Silver and gold miners are beginning to perk up. Financials are setting up for a potential breakout. There are enough places to rotate to if the hot action in cleantech and biotech subsides for a bit. 

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Momentum Monday – The Big Squeeze

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Momentum stocks were on absolute fire last week and accelerated their ascent – software (FSLY, APPS,VRNS, MDB, WDAY,IGV, etc.), cybersecurity (HACK), anything cleantech (especially solar TAN and fuel cells like PLUG, BE, BLDP, FCEL), social distancing (PTON), e-commerce (CHWY, RVLV, ETSY, SHOP), e-sports and games (SKLZ, NGMS, PENN, CRSR, DKNG), online payments (SQ, PYPL, PAGS, STNE, ADYEY), real estate software (RDFN, Z, FTHM, EXPI, IPOB), select biotechs (TGTX, SGTX, BTAI, IONS, SAGE, RARE, ITCI), homebuilders (NAIL). Gold and silver also started to move as it became clear there is an agreement for a new stimulus. Bitcoin broke above 20k. Even some of the mega-cap like AMZN, AAPL, and MSFT woke up. The U.S. Dollar made new multi-year lows.

Many momentum stocks are looking extended for new entries here. I wouldn’t advise chasing stocks that are up multiple days in a row and 20-50% in the past 1-2 weeks. We certainly noticed an uptick in volatility last week – there were quite a few failed breakouts and reversals which means many people are anxious to take profits quickly. Capital is not leaving the market. It is just rotating very rapidly. There is still a good number of decent long setups and they might just continue to work into the end of the year. Until all major indexes’ 5-day EMAs are above their 20-day EMAs, we should be focused on long setups.

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Momentum Monday – Bull Markets Correct Through Sector Rotation

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It is truly astounding how well the indexes are holding considering the recent vast increase in supply via widely popular IPOs like AirBnB and DoorDash which were given very generous valuations and the billions poured in hundreds of SPACs that are going to bring public many private companies that would have otherwise never had the chance to become public. There will be many clunkers among them. Probably 80% of the SPACs will eventually lose more than 80% of their initial valuations or worse so you better have an exit strategy instead of blindly trusting a good story.  Among the rough though, there will be some diamonds just like Amazon and Priceline in the late 90s. 

We are still in the proverbial market of stocks environment. The mega-caps like AMZN, NVDA, MSFT, FB are struggling and cannot follow through while smaller cap stocks have been on absolute fire, including some little expected industries like oil & gas and even uranium stocks. Don’t get me wrong. Capital is not leaving all large caps. It is just rotating into stocks with fresh catalysts: 

  • Disney (DIS) broke out to newe all-time highs after announcing new content
  • Toyota  broke out to new all-time highs after revealing a car battery that can bee fully charged in 10 minutures and lasts for 300 miles
  • Starbucks (SBUX) broke to new all-time highs after revealing their new growth strrategy. 

In other words, the market is in a good mood. It is not looking to punish stocks for the slightest misstep. It is looking for a reason to send them higher.

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