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.
S&P 500 Momentum: Green
Broad Market Momentum: Green
Momentum remains Green heading into Tuesday.
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.
While I'm out you can always watch episodes of Midday Momentum you may have missed by heading to our REPLAYS tab on MoneyMorningLive.com
Or one better, sign up for the World's Biggest Trade and become a globetrotter helping me scour the world for today's big winner.
Get instant access to our trading room, pre-market reports, and member exclusive replays of the World's Biggest Trade today!
Join over 500,000 readers and get free daily updates on the best ways to make money. Subscribe to Money Morning.
Follow Money Morning on Facebook and Twitter.