Momentum Stocks Are Great Leading Indicators

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I pay close attention to the action in momentum stocks. They are called market leaders for a good reason. This is what I tweeted yesterday:

Keep a list of leading momentum stocks and watch how they act. Many of them are likely to get hit just before the market indexes’ selloff accelerates. You can create your own list of momentum stocks by scanning for the top performers on a 6 and 12-month time frames or you can take a shortcut and use established lists like the SL50 from MarketWisdom.com and IBD50 from Investors.com. A list of momentum stocks is a great source of long trading ideas during rising markets, it is a great leading indicator for both rallies and selloffs, and it is a great source of short trading ideas during corrections because most momentum stocks take a hard hit during general market declines.

From a big picture perspective, nothing has changed. All major U.S. stock indexes are still in an uptrend. Dip buyers are likely to step up around $180 for the Nasdaq 100 (QQQ). The sustainability of that potential bounce will largely depend on the price action in individual momentum names, because as I mentioned earlier – they tend to lead on the way up and on the way down.

Is PetIQ Ready for a Monster Short Squeeze?

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Keep an eye on PETQ tomorrow. They make pet medications and are growing at an impressive pace: 98% quarter-over-quarter sales growth and 39% earnings per share growth. PetIQ just absolutely crushed earnings estimates, reporting $0.64 while the market expected 0.38! They also raised their full-year guidance. More importantly, the stock is up 15% after the close and it is trading at new all-time highs near $32. 37% of its tiny 14-million-shares float is short. There’s a decent potential for a short squeeze in the next few days with a target 35-40.

Here are some interesting comments on Twitter that add a fresh perspective to PetIQ’s numbers:

Reaction to News Is More Important Than the News Itself

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Netflix reported a 467% earnings growth a couple weeks ago and it still sold off.

Amazon announced a 999% earnings growth and 39% sales growth. Its numbers were double the average analyst’s estimates and it still sold off.

Shopify just beat the estimates by 170%. They reported earnings per share of 2 cents while analysts expected a loss of 3 cents per share. SHOP gapped down and it is currently trading more than 20% below its all-time highs.

Reaction to earnings is a lot more relevant than the earnings themselves. A triple-digit growth or triple-digit earnings surprise is not essential if the market has already discounted it. What matters more from a practical point of view is the market reaction. If a company reports earnings and its stock gaps up to new 52-week highs and closes near the highs of its daily range, then the market was truly surprised and this stock probably has more upside ahead.

In its struggle to be forward-looking, the market can often act counter-intuitively to many. Short-term tops are often formed when a stock sells off on what appears to be great news on the surface. Short-term bottoms are often created when a stock rallies on bad news.