A Bird in Hand is Worth Two in the Bush...
by John Lui - Managing Director and Chief Investment Strategist
"Markets take the stairs up and the elevator down" while momentum stocks take the elevator up and down!!...
Momentum trading is the opposite of "buy low and sell high"; momentum traders "buy high and sell higher" (hopefully). I have in the past sounded the alarm when momentum stocks/momentum investing have become the primary driver of the stock market with prior writings such as "Nachos Para Machos" and I do so again.
This does not mean I am bearish. I remain bullish as this new bull market is young because corporate profits have only recently bottomed while inflation/interest rates have just peaked. I am, however, cautious on the handful of momentum stocks that have led the markets out of the bear market.
Momentum is more prevalent today due to the financial media talking heads, hedge funds, computerized trading, social media influencers and index fund investing, which makes it very hard to go against "conventional wisdom" to conclude that "the Emperor is wearing no clothes". I think Hans Christian Andersen would have been a great investment advisor.
Press the Al button to go up but you will never know when the elevator will plunge...
Not to pick on Super Micro Computer (SMCI), but I can definitely say that this is a momentum stock as you can see from the chart below. SMCI took the elevator up and it is clearing descending very fast in the elevator. When will SMCI's stock stop falling depends on mob theory, but I can say that each member of the mob that rode the stock up is saying to themselves another old Wall Street adage: “Bulls make money, Bears make money, but Pigs get slaughtered.”
Indexing and secondary stock offering...
I mentioned earlier that indexing has played a role in adding to the momentum building in the market. Here is how. The "smart folks” at Standard and Poor's decided to add SMCI to the S&P 500 because the stock had done so well, which forced a tsunami of mindless buying from the mountain of S&P 500 Index funds. SMCI management seeing all this mindless momentum buying from S&P 500 index funds and fretting “Pigs get slaughtered” sold stock in a secondary offering into this. In addition, shortly after the secondary stock offering, SMCI failed to pre-announce strong quarterly earnings and raise guidance for future earnings. Ultimately, earnings released last week failed to exceed expectations. SMCI's stock price continues to ride the elevator down.
"A bird in hand" new leadership as the market broadens away from momentum stocks...
High quality dividend stocks offer long term investors a “bird in hand" as they will get paid quarter after quarter; in addition, dividends are often more likely to get increased over time. High quality dividend stocks have lagged the momentum stocks by quite a lot. I expect them to outperform as the stock market rally broadens out beyond momentum stocks.
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Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.
