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Introduction
What is most important isn’t knowing the future – it is knowing how to react appropriately to the information available at each point in time.” ~ Ray Dalio
So then…
Why aren’t momentum strategies exploited by all smart investors and arbitraged away?
* Investors will continue to suffer behavioral bias.
* Investors who delegate [their investments] will look for short-sighted performance chasers who are compelled to deliver immediate results.
* The ability to stay disciplined to a process is arguably the most important aspect of being a successful investor.” ~ Gray, W., & Vogel, J. (2016)
Timing matters, and it matters greatly. I have spent the last 35 years trading, researching, and constructing algorithms to identify and leverage the value across fundamental, technical, and behavioral finance models. Of the ten portfolio models designed for optimal portfolio mixes for members to beat the market at Value & Momentum Breakouts, eight come from enhancing well-tested anomaly research in published financial journals.
If you believe, like I do, that there is much more to stock trading than just buy, hold, and hope that every future event works out perfectly as promised for your stock, then these trading models are for you. This article highlights some key changes in stock, sector, and market signals that may benefit your trading decisions. I am certain again this year that we will see more rotation, and if you are just riding the buy and hold approach, you can find yourself in a painful situation.
Key Momentum Signals Turning Negative
This article follows up on my prior cautions in July of cyclical pullbacks and much higher volatility in the months from August to October. Back in May when we were getting many positive buy signals we noticed that fund manager’s flows were at the lowest levels in 2 years. Now as we enter August these fund manager inflows have pushed indices to all time highs.
Once again as early as mid-July our signals were weakening and now I can confirm numerous strong indicators are not just weakening but negative again:
In the prior article, I advised readers to watch Nvidia (NVDA) closely, the Semiconductors (SOXL) bull fund, and the Technology sector for early warnings of a pullback after record gains driving the market indices to new highs. In this article I will now share how each of these selections relates to market timing and our anticipation of the next negative signal using stock, sector, and market momentum gauge charts reviewing these selections:
* SOXL – Direxion Daily Semiconductor Bull 3X Shares
* Nvidia Corp.
* Qualcomm Inc (QCOM)
* Intel Corp. (INTC)
* Advanced Micro Devices (AMD)
So next I provide a sampling of how we use the different momentum gauge signals to identify long term continued strength, short term aggressive breakouts, and even apply timing models to market and sector momentum conditions for the best results. As I repeatedly tell our investment community, it is important to not only diversify your stock selections, but it is also critical to be where the market flows are improving for the best returns.
As many long-term traders know well, it is very rare for one type of investment to lead in consecutive years. More details explain our process in my 2025 Market Forecast article. I am certain again this year that we will see more rotation, and if you are just riding the buy and hold approach, you can find yourself in a painful situation.
Largest Negative Momentum Signal since February
The Market Momentum Gauge daily chart below is based on an equal weighted algorithm of over 7,500 stocks in the major US stock exchanges. In the daily market chart below you can see the first negative signal this past Thursday after the longest positive signal of 67 consecutive trading days since January 2020.
Not only did our market gauges turn negative on Thursday in time to avoid major declines on Friday, but we had seven consecutive trading days of declining positive momentum values to warn us of a strong potential negative signal. In this time we moved more to cash, picked up a few bear funds and positioned to hedge some profit taking. When we see the changes in the positive/negative momentum conditions begin to move lower from peak highs and rise from max lows it gives us time to adjust our portfolios accordingly. What it does not tell us is how long any move will sustain into the future.
Negative Technology Signal
I call the Technology sector, the bellwether sector of the market. The Major Indices are so heavily weighted on the technology stocks that it is almost irrelevant what many other sectors are doing when they have much smaller representation on the S&P 500 (SPY) and Nasdaq (QQQ). (NVDA) alone has a larger market cap than the entire Russell 2000 combined (IWM).
So when we got our first negative Technology signal back on July 15th, I exited our Technology sector bull funds and reduced personal exposure to the market as detailed in my July caution article.
While the negative signal was brief back on July 15th, these signals often come in clusters that warn of rising negative momentum conditions or larger pullbacks. My reaction to the data available to me at the time was to bank the gains in our Active ETF portfolio as shown below. In the past week the signals have put us in bear funds as a majority of sectors turn negative.
Negative Semiconductor Segment Signal
I have written at length about the importance of semiconductors in our market. They include the largest stocks in the market, within the largest sector in the market, representing the largest weighting on the most followed major indices of the market. If you know what semiconductors are doing you have a strong grasp on where the market may be heading. This is why I highlight semiconductors so frequently for my readers, although many of my public updates are deliberately delayed to protect member value.
In the technical chart of the Direxion Daily Semiconductor 3x Bull fund (SOXL) since 2024 you can see significant moves including the July 2024 breakdown. It has not been until the recent rebound from the April lows that semiconductors have delivered a strong positive signal. Last year I was getting strong negative signals in April and July. I will be watching to see if the current pullback will reach negative values as high as those days:
Lastly, we will examine a few key semiconductor stocks. Using my proprietary MDA algorithm we can analyze a few charts. First we can see that Qualcomm (QCOM) and Intel Corp (INTC) disappointed on recent Q2 earnings and have not sustained a positive Segment 6 MDA signal yet this year and are back in negative Segment 2 MDA in red. On the other hand we can see that Advanced Micro Devices (AMD) and NVIDIA Corp (NVDA) continue near max positive Segment 6 MDA signal in green. However, both AMD and NVDA have yet to report earnings and their price is in technically high short term overbought levels.
Obviously, it will be key to see if NVIDIA, the largest stock in the semiconductor segment and in the world, can sustain the positive signal into August. For now we are seeing risk increasing and many more market and sector gauge signals turning negative.
FINRA cautions investors that:
Exchange-traded funds (ETFs) that offer leverage or that are designed to perform inversely to the index or benchmark they track-or both-are growing in number and popularity. While such products may be useful in some sophisticated trading strategies, they are highly complex financial instruments that are typically designed to achieve their stated objectives on a daily basis. Due to the effects of compounding, their performance over longer periods of time can differ significantly from their stated daily objective. Therefore, inverse and leveraged ETFs that are reset daily typically are unsuitable for retail investors who plan to hold them for longer than one trading session, particularly in volatile markets.
As a reminder from prior posts and articles. Buy and hold can lead to great pains, and if you are lucky, you may get back right back to where you were five years ago. NVDA accounts for 13 of the 20 largest market cap swings in history, as well as the largest daily decline in history, even just this year.
Conclusion
What I offer readers is intended to share different models for your future success. Consider your behavioral bias and how you will choose to react to information as you receive it at different points in time. These ongoing sector rotations and signal changes continue to give us many new opportunities for profit in the years ahead as we build our optimal portfolio mixes each year.
While I don’t profess to know how long any signal will last, I do know that timing matters greatly. This article shares a few ways to detect strong opportunities early and leverage unique statistical models published in financial literature for our benefit. You may be able to leverage our selections and signals even better than I do.
I wish you well in all your trading decisions,
JD Henning, PhD
References
Gray, W., & Vogel, J. (2016). Quantitative Momentum. Wiley.
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JD Henning is a Finance PhD, MBA, investment adviser, fraud examiner and certified anti-money laundering specialist with more than 30 years trading and investing stocks and other securities. JD runs Value & Momentum Breakouts where he identifies identify breakout signals and breakdown warnings using technical and fundamental analysis. Signals from his proprietary Momentum Gauges® not only alert subscribers of market changes, but the strength of markets for short term breakouts or breakdown warnings across 11 different sectors. Top stock and ETF selections use technical and fundamental systems in proven financial studies. Value & Momentum Breakouts is the place to build your own optimal portfolio mix with a community of like-minded investors and traders. Features include a Premium Portfolio, bull/bear ETF strategy, morning updates and an active chat room.
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Analyst’s Disclosure:I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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