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We had another nice momentum rally yesterday, thanks to short covering, speculation, and positive volumes. But - once again - we had another monster tech company turn around and ruin the gains. Alphabet (NASDAQ: GOOGL) - right in the middle of the day - announced its own freeze on hiring. That announcement came a day before Ford Motor Company (NYSE: F) said it would lay off 8,000 employees.
As you'll see below, this recent rally is largely built on the back of short covering (although we've seen plenty of position sizing by insiders as well). This rally likely isn't sustainable, as most bear market runs are not. I assure you - the second that we turn negative momentum again - you'll know.
That said, I'm still battling the religious experience that is COVID, so, unfortunately, I will not be on Midday Momentum this afternoon. However, they have sent a suitable replacement. You should keep your trailing stops very tight in this market. Also, continue to focus on those stocks that are hitting 52-week highs and 52-week lows for idea generation.
This morning, new highs include: VERU, COGT, LRN, WFG, BAH, and TPL.
New lows include: ENVB, DRD, FNV, WPM, NEM, CZOO, NYC, and HTA.
Chart of the Day: Short the World
The other day, I read an interesting interview suggesting that the VIX wasn't elevated due to so many investors sitting in cash. That's what you should be doing if momentum is red.
But, momentum isn't red. It's turned Green, and now hedge funds and leveraged funds remain overexposed on their short trades.
What you're looking at in this chart is an analysis of the "Commitment of Traders" report that comes out on Fridays.
It works like this - we get data on Tuesdays that tell us if hedge funds and leveraged funds are long or short certain futures contracts. That includes everything from gold, silver, oil, natural gas, and S&P 500 futures. As you can see, in early July, funds were net short the market for the first time in years.
This can explain why we had very low volumes but lots of short covering. The data for this week comes out on Friday, so be cautious. This little Green momentum move may ONLY last three to four days. If that is the case, set very tight stops.
Also, if we turn red again, be prepared to short this market aggressively.
- It's going to be a volatile day for natural gas prices. We're watching natural gas inventories. Can we trade KOLD and BOIL, please?
- Look for earnings from AT&T Corp. (NYSE: T), Snap (NYSE: SNAP), CROCS (NASDAQ: CROX), American Airlines (NASDAQ: AAL), Phillip Morris (NYSE: PM), DR Horton (NYSE: DHI), Dow (NYSE: DOW), Domino's Pizza (NYSE: DPZ), and Capital One (NYSE: COF).
- Also, look for big moves in Boston Beer (NYSE: SAM) and SVB Financial (NASDAQ: SIVB) around their earnings reports.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, consultant, and political risk analyst with decades of trading experience and degrees in economics, cybersecurity, and business from Johns Hopkins, Purdue, Indiana University, and Northwestern.