Human nature is such that nothing teaches us better than the school of hard knocks.
Until the last quarter of 2018, many individual investors were fond of making contemptuous comments every time I wrote about the importance of gaining an edge. Of course, professional investors have always known better.
In a bull market, everybody is a genius. Often, investors with less knowledge end up doing better than prudent investors. The reason is that prudent investors take steps to control risks. Now, after the last painful quarter for those less informed, not only are the contemptuous comments gone, but a whole new group of investors want me to teach them how to gain an edge.
One of the best tools to gain an edge is segmented money flows. Let’s explore with the help of a chart.
Please click here for a chart showing segmented money flows in 11 popular tech stocks. Due to the popularity of these stocks, it makes sense to look at them in addition to Dow Jones Industrial Average
and broad-based ETFs such as S&P 500 ETF
Nasdaq 100 ETF
and small-cap ETF
Please note the following:
• As shown on the chart, momo crowd money flows are extremely positive in Netflix
Short-squeeze money flows are also extremely positive in Netflix. (On Friday several analysts upgraded the stock.) This means Netflix can fly if there is some good news, such as earnings that are better than the whisper numbers. Investors ought to pay attention to whisper numbers and not the consensus numbers because stocks move based on the difference between those two.
Note on the chart that the smart money flows are neutral in Netflix. This goes back to what I said above. Smart money tends to take risk into account. After the recent run-up in Netflix, when risk is taken into account, in addition to the potential reward, the risk-reward is balanced. The momo crowd does not care about the risk and continues to heavily buy.
Also notice the contrast between the non-risk-adjusted ranking of one and the risk-adjusted rankings of nine. I will explain rankings later.
• As shown on the chart, momo crowd money flows are positive in AMD
Short-squeeze money flows are extremely positive in AMD and very positive in Amazon. In plain English, this means that these stocks can fly on good news.
In contrast, smart money flows are neutral in both Amazon and AMD. The rankings shown on the chart for Amazon and AMD reflect the contrast between taking risk into account and ignoring risk.
is the only stock among the popular 11 tech stocks shown on the chart with positive smart money flows. In contrast, the momo crowd does not like Intel.
• Momo crowd money flows are positive in Tesla
and short-squeeze money flows are extremely positive.
has been the poster child of the most recent bull market. When Nvidia was trading at $292, smart money flows in Nvidia were negative but momo (momentum) crowd money flows were positive and at times extremely positive. Since then, smart money flows consistently stayed negative on Nvidia while momo crowd money flows stayed positive on Nvidia until it gapped down. Nvidia has traded as low as $124.
During the fall and at the top in Nvidia, The Arora Report rating has been “sell.” However, now the ZYX Change Method with the six screens is coming close to giving a buy signal if there is a major down spike in Nvidia below the recent low. We will provide a specific buy zone along with a stop zone and a target zone, and the appropriate position size when the signal is given.
Now after the big drop, smart money flows have turned neutral and a for a very short period when the stock traded below $127, smart money flows had turned positive.
• When Apple
was reaching its high at $233.47, smart money flows were neutral but momo crowd money flows were positive and at times extremely positive. Since then, Apple fell as low as $142.
The Arora Report’s “buy now” rating during most of the Apple fall and at the top was “no.” Now momo crowd money flows have turned mildly positive in Apple.
• As the chart shows, momo crowd money flows are positive in Alibaba
but smart money flows are neutral.
Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.
The chart also shows relative rankings of the 11 popular tech stocks. Those 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 positions or trade-around positions.
What to do now
Investors need to accept that the character of the market is changing. What has worked over the past nine years may not work in the future. Investors ought to shift their mindset from a “buy, buy and buy” mode. Consider following a comprehensive adaptive model that has a proven track record in both bull and bear markets. It is important not to rely on static models because market conditions have changed. Static models that may have worked in the past may not work in the future.
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.