For investors who want an edge in the stock market, segmented money flows is one of the best tools.
Money flows represent the final actions based on fundamental, technical, quantitative, macro and sentiment factors. For this reason, money flows can be used as a shortcut to start an analysis. The power of money flows with spot-on calls is at full display during this earnings season.
Let’s explore with the help of a chart. Please click here for a chart showing segmented money flows in 11 popular tech stocks. Since tech stocks are the market leaders, it makes sense to look at the money flows in tech stocks in addition to the Dow Jones Industrial Average DJIA, +0.15% and broad-based ETFs such as S&P 500 ETF SPY, -0.21%, Nasdaq 100 ETF QQQ, -0.54% and small-cap ETF IWM, -0.73%. Please note the following:
• The power of money flows is at full display in shares of Alphabet, aka Google GOOG, -1.24% GOOGL, -0.67%. After Google reported earnings significantly better than the consensus and whisper numbers, its stock rose about 10%.
In the prior quarter, Google reported significantly worse earnings than the consensus and whisper numbers. The momo (momentum) crowd aggressively sold. Most analysts downgraded Google. There were many “sell” calls made privately.
In the face of all this negative information, we held on to Google in the Model Portfolio. One of the tools that helped us was consistent mild positive smart money flows as the stock fell.
• Going into earnings, negative smart money flows were one of the factors in allowing us to have a short position in Netflix NFLX, -1.33%. This short position was maintained in the face of mostly highly bullish pronouncements from Wall Street and very positive momo crowd money flows. Netflix reported disappointing subscriber numbers and earnings that were worse than the consensus and whisper numbers. Netflix’s stock dropped about 10% after reporting earnings. We took the opportunity to take profits. (In a short position, money is made when a stock falls.)
• Going into earnings, smart money flows in Amazon AMZN, -2.38% were neutral but momo money flows were very positive. Amazon reported earnings worse than the consensus and whisper numbers. The stock fell after earnings were reported.
• Going into earnings, smart money flows in Tesla TSLA, +1.88% were neutral but momo crowd money flows were positive. Tesla reported earnings that were worse than the consensus and whisper numbers. The stock fell after earnings were reported.
• Going into earnings, smart money flows were mildly positive but momo crowd money flows were very positive in Facebook FB, -1.87%. Facebook reported earnings that were better than the consensus and whisper numbers. Facebook’s stock initially rose but then pulled back due to comments about slowing growth rates and higher expenses on the conference call.
• Momo crowd money flows are positive in Nvidia NVDA, -0.50% and Alibaba BABA, -1.29%.
• Momo crowd money flows are very positive in Microsoft MSFT, -0.44% and Apple AAPL, +1.09%.
• Momo crowd money flows are extremely positive in AMD AMD, -2.18% but negative in Intel INTC, +1.34%.
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Short squeezes
The chart shows the potential for short squeezes in 11 popular technology stocks.
In a short squeeze, short sellers are either compelled or feel compelled to buy a stock to cover their position. Buying to cover by short sellers often starts a move up in a stock.
A short squeeze leads to a lot of artificial buying that is not based on fundamentals.
Rankings
The chart also shows the relative rankings of the 11 popular tech stocks. These rankings 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 or trade-around positions.
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.