High Momentum Stocks are Fading – What Does it Mean?

Click on the link above to get my take on the best value stocks amid market volatility.

After July quarterly earnings, the stock market not only pulled back from the highs, but it’s done so in a different fashion than the previous times it has pulled back before. Normally, in a market pullback in a trend following environment, what we will see is the high momentum stocks being to trade higher first (the Phoenix) but this has not been the case this time around. Instead, after the pullback, high momentum stocks have been sold off and have been unable to recover. This includes industry groups like cloud computing and cyber security, along with the once hot IPOs of 2019.

This type of price action is typically a bad omen for the overall market, and it suggests that big money is losing confidence in these once high growth names.

What does it mean for us? Well, for one, one of my favorite ways to trade is exploit long options on high momentum stocks, and that just isn’t a setup we have right now.

Secondly, it’s a bad omen for the health of the overall market. The indexes are still ‘strong,’ but there has been strength gained in other areas of the market that don’t include high momentum, and you have MSFT and AAPL doing most of the work to hold up the Nasdaq. They can’t hold it up alone forever.

So, what do we do? I’m exercising a lot of caution in this market, and using low priced, options trades such as butterflies and spreads. I’m not looking for high momentum breakouts like we are used to trading. It’s been better to focus on range bound movements, instead of looking for explosions in price that I normally love to trade! I have also been trading on a shorter time frame, and using smaller profit targets and zones.

I have also been shifting my focus to value areas of the market, such as consumer staples along with trading a bit of gold and bonds.

Are the high momentum days gone? It’s going to depend on upcoming earnings – the next catalyst. This will be the chance for these stocks that have been beaten down to prove that they are still earning, growing, and investors should have confidence in them.

 

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