Investors ought to pay attention to the changing character of the U.S. stock market.
What has worked for the past nine years may not work for much longer. Investors may want to prepare now and fine-tune their skills for a different kind of market. I will illustrate the point by showing how money flows give investors an edge.
Let us examine with the help of a chart. Please click here for the chart of money flows in 11 popular technology stocks. Please note the following:
• As Nvidia NVDA, -12.00% was reaching new highs, smart money flows in the chipmaker had turned negative. Since the new high, momo (momentum) crowd money flows in Nvidia have been positive until after the big drop in the stock. If you were paying attention to smart money flows, you got an early warning and saved yourself from big losses or, at a minimum, did not give up your gains.
• Nvidia has been the favorite of analysts and the momo crowd until the most recent earnings report.
• Nvidia is the poster child for bull market excess. It was well-known, prior to the release of the latest earnings report, that some of the end markets for Nvidia chips were flagging. Yet analysts failed to lower their targets. Nvidia has fallen to $162 from a high of $293.
• In the past, even when there have been disappointments, most analysts have not lowered their targets on their favorite tech stocks.
• Something has now changed in analysts’ behavior. After Nvidia stock fell, analysts have been reducing their targets.
• Smart money flows are neutral in Apple AAPL, -3.96% Amazon AMZN, -5.09% Netflix NFLX, -5.45% and Alibaba BABA, -2.97%
• Smart money flows are neutral in AMD AMD, -7.50% and Microsoft MSFT, -3.39% but positive in Intel INTC, -1.70%
• Smart money flows are mildly positive in Alphabet GOOG, -3.91% GOOGL, -3.82% and Facebook FB, -5.72% In contrast, momo crowd flows are extremely negative in Facebook and negative in Google.
• Smart money flows are neutral in Tesla TSLA, -0.24% but momo crowd money flows are positive.
Read: These people have been buying up stocks faster than anyone since 1989
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Rankings
The chart also shows the relative rankings of the 11 popular tech stocks. Those 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 positions or trade-around positions.
ETFs
Money flows in broad-based ETFs such as S&P 500 ETF SPY, -1.69% Nasdaq 100 ETF QQQ, -3.25% and small-cap ETF IWM, -2.03% have been neutral. Cumulative money flows in the 30 constituents of the Dow Jones Industrial Average DJIA, -1.56% have also been neutral.
What to do now
Since the character of the market is changing and what has worked over the past nine years may not work in the future, investors ought to follow adaptive models that have a proven track record in both bull and bear markets. In plain English, “adaptive” means models that change with market conditions. Static models work in some market conditions but not others. An example is the ZYX Asset Allocation Model. Please click here to see how the model changes itself.
Positive seasonal inputs are ahead, and many investors are expecting a year-end rally. A lot will depend on what happens in the meeting between President Trump and his Chinese counterpart on trade. The Arora Report provides its subscribers the precise level of hedges and cash to hold. At this time, it is important to hold a fair amount of cash. Our plan is to selectively buy stocks, especially special-situation stocks. You will not be able to take advantage of the new buying opportunities if you are not holding enough cash.
Please see “How one investor sidestepped this week’s stock-market decline.”
For a shorter-term perspective, please see “These two chart patterns tell the real story of the stock market.”
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.
