Momentum Monday – The Dip Was Bought Again

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Last week was a mirror image of the previous – the highly-shorted meme stocks crashed and the rest of the market went to the moon. There were so many  20-30% bounces in momentum stocks that pulled back to and below their 50-day moving averages in the previous 2 weeks. 

Sentiment was so gloomy entering last week that it seems for a moment we had forgotten that dips are buying opportunities in bull markets. Pullbacks to 20 and 50dmas are normal and even desired because they provide good risk/reward entry points and keep the FOMO (fear of missing out) in check. Such shakeouts are needed because they create anxiety and doubt. No trend can continue without skeptics because otherwise there would be no one left to buy.

There are currently so many underlying trends:

  • The biotech ETF made new all-time highs. Gene-editing stocks have been raging higher;
  • The so-called recovery stocks continue to outperform – financials, oil & gas, leisure, small caps in general;
  • Inflation plays are waking up. Despite rising interest rates, the homebuilders ETFs broke out on Friday and are approaching their all-time highs;
  • Many cannabis stocks have already more than doubled since the November elections. The dips to rising 20-day EMAs in the sector remain buying opportunities; 
  • Obviously, the clean energy stocks are still in play. They are currently in a consolidation period. Don’t lose sight of them. After a few weeks of pullback or sideways action, many of those names can set up again.

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Momentum Monday – The Short Squeeze That Broke The Market

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The past few weeks have been one giant short squeeze and everything accelerated last week. The size of the squeezes has been unprecedented and they have led to liquidations in other areas of the market. All major market indexes closed the month below their 20-day moving averages for the first time since October of last year and are currently in a pullback mode. 

What is currently quite fascinating is that we are in the midst of a new earnings season and no one is paying attention to earnings reports. All the attention is focused on stocks like GME, AMC, BB, NOK, and other highly shorted assets which are now negatively correlated to the major market indexes. The short squeeze bets have been so one-sided that they have led to liquidity crunch in some brokers. 

There’s another concern on the market’s mind right now. All those new Covid mutations and new restrictions around Europe have inspired a new life in Covid-related stocks. Most vaccine stocks were on fire last week – NVAX, MRNA, BNTX, VXRT. Covid testing stocks also showed notable relative strength after HOLX and ABT crushed market estimates.

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Momentum Monday – Constant Sector Rotations

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Bull markets correct through sector rotation. We see that every week. This is what keeps the market going without having any significant correction. Last week, we saw energy, industrial metals and biotech pulling back while tech mega-cap woke up, Chinese, homebuilders, and highly-shorted stocks sky-rocketed. We see a version of it every single week. Obviously, it is not going to last forever. Bull market rallies end when there’s not a single cloud in the sky but as Peter Lynch likes to say “far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than during the corrections themselves”. When we start seeing more breakdowns, we can focus on short setups. At the very least, we want to see first the major indexes (SPY, QQQ, IWM) trading below its previous week’s lows. This hasn’t happened since October.

The WSJ posted an article that a basket of the most shorted stocks is up 25% year to date. There’s a saying that a high flying stock is not going to top until the last short seller is squeezed. This is why we see a big acceleration in highly shorted stocks before they top out. GME is a good example from last week. 

Every share that has ever been shorted will be covered at some point. Covering means buying. When a significant percentage of a stock’s float is short, it has a lot of short squeeze material. Short sellers cover for two main reasons:

  1. When the stock they are shorting has been decimated and reached their target levels.
  2. When they are forced to cover because the price of the stock they are short keep rising.

Momentum money has been going hard after the highly shorted stocks lately. Some names to keep an eye on for the next week: FUBO, SNOW, RKT, CRSR, AI, GOGO, etc.

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Disclaimer: Everything I share is for educational and informational purposes only and it should not be considered financial advice.