How "FOMO" Is Driving This Market Higher

When you hear the expression "fear of missing out," better known as FOMO, aside from images of jumping out of planes or bungee jumping (if that's still a thing), do you ever think of investing?

Well, that's exactly what's going on with the market right now - FOMO. However, only a month ago, professionals like me were hedging against this market. And for good reason.

It really was the smart money move to make at the time. Not only had the yield curve inverted, but earnings reports were getting ready to hit the wires, and geopolitical tensions like the trade war were making headlines right and left.

The risks were stacking up.

Then, within a week or so, things changed faster than a set of tires at the Indianapolis Speedway on Memorial Day weekend. The bond market gave forgiveness with higher rates. Earnings beat lowered expectations, but nonetheless still beat them. The trade war... well, it's still hanging in the balances, but moving towards something that resembles a deal.

We're now ratcheting to new highs daily.

Getting back to the professionals, it looks like hedge funds and active managers are now moving from the sidelines back into stocks, which is fueling the current rally. The chart I'm going to be showing you in a minute is one representation of this activity.

Overall, the continued feeling of FOMO should be considered a new catalyst for the market to move higher, which is one of the reasons that I've been repeating one of my Ten Commandments of Trading, "Don't fight the tape!"

Let's look at exactly how we can play this market and avoid getting left behind...

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Here's What the Market's Telling Us

The chart below, from the National Association of Active Investment Managers (NAAIM), shows money managers' exposure to the market. After a dip in August and October, this index is quickly rising as money managers plow money back into the market for FOMO on a year-end rally.

All things considered, this market will find the path of least resistance pointing higher, solely based on the fact that smart money is now engaged in getting its money off of the sidelines.

So, where does that leave us?

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For one thing, my subscribers did pretty well last week. We're taking the necessary steps in the management of our portfolio as we head into what will be a strong November. Continuing to be positioned with a good mix of calls and puts will allow you to take profits as the market moves higher and lower with a slightly bullish trend.

Note that I said "slightly bullish." This market is not a screaming buy, nor one where you can buy any stock and think that it will move higher. This remains a stock picker's market, which is why my confidence is building.

Let's look at a stock I recently closed on, Arbor Realty Trust Inc. (NYSE: ABR). The stock absolutely beat its peers and the market over our holding period. That's the kind of selection that the model will continue to do to make this one of the better months that we've had all year.

In fact, I'm putting my subscribers on bullish recommendations right now (you can actually learn how to get those research recommendations right here), but in general, it's a good time to go long on trade-sensitive stocks and stocks with excellent fundamentals overall.

Of course, there will be pauses in the excitement, as we saw last Friday. The trade war took an unexpected turn when the White House made it clear that the proposed rollback of tariffs wasn't popular.

I loved one of the headlines that pointed out that advisors "in and out of the White House" were objecting. That means lobbyists. Suffice it to say that today's mixed-market activity is representing the sudden drop in confidence that "phase one" is a done deal.

So as always, we've got to be prepared for anything. And in order not to miss out, our slightly bullish sentiment should help us pick and choose the stocks that we know will do well in this FOMO-fueled stock picker's market.

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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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