The MOMO Guys Are Back

The MOMO (Momentum) guys are back and they tripped over each other all day… 

Stocks raced higher as the market “melted up” and earnings continue to shatter the expectations. Word that the government awarded MSFT the JEDI (Joint Enterprise Defense Infrastructure) contract caused a new round of buying across tech. Apple and Google surged higher during the day as the market awaited its earnings.

GOOG came out after the bell and did what? It missed on earnings reporting $11.59/share vs. the $12.35/share. Traders took took it down 2% in the afterhours session, wiping away the 1.8% gain during the day. While they missed on earnings (due to underperformance in “other investments”), they crushed on revenues. Third quarter revenues totaled $40.5 billion, a 20% rise from last year. But profits were down by 23% year/year. That is a bit misleading, because last year’s results were artificially boosted by the tax law changes, changes that are a “one time” event. changes which analysts should have accounted for. What is “more real” is that its margins are under a bit of pressure as costs did rise. That is what most asset managers will focus on… GOOG is up 35% year-to-date… and it’s Google. I mean is anyone concerned that its days are numbered?

Apple earnings are not due out until Oct 30, so you have to wait one more day. While the market ended the day higher, it was off the highs of the day.

At 4 pm, the Dow stood higher by 132 points or 0.48%, the S&P gained 16 points or 0.56%, the Nasdaq was ahead by 82 points or 1% and the Russell added 13 points or 0.85%

Apparently, what we saw is that the idea of a trade deal (Phase One), better earnings, and an accommodating FED “were not priced in” to the action. Investors who have been playing it safe (me included), traders who were playing from the short side, and portfolio managers that had “hedged their bets” all suddenly realized that maybe that was the wrong position to take. Remember that the market kept teasing and flirting with S&P 3000/3010 for weeks now, always backing off a bit. It was unable to pierce it due to all of the underlying macro concerns — then the realization that part of the trade deal is really moving along, earnings were not the disaster that the street made them out to be and the weekend news about how we cornered ISIS leader al-Baghdadi and watched as he blew himself up and the news that the EU granted a 3 month extension to the UK was all anyone needed to go “all in” and blow the roof off the house. And the fact that the FED is about to cut rates tomorrow lit the world on fire. And so it goes…

And the idea of that recession, you know the one that we spoke about ad nauseum only weeks ago, is nowhere to be found. All you have to do is look at the Dow Transport index and it will tell the story. The transports ended the day higher (again), following three straight weeks of gains, suggesting that investors do NOT feel like a recession is anywhere close to happening. Why? Because if they did, they wouldn’t be buying the truckers, the rails, and the shippers as all of the transports do what? They TRANSPORT GOODS AROUND THE WORLD because there is DEMAND, and if there is DEMAND then there is NOT a RECESSION. Capisce?

The Dow Transports are up 29% year-to-date and up 12% in the month of October alone, the Dow Industrials are up 19% year-to-date and up 5% in October, The Nasdaq is up 28% year-to-date and up 8% in October and the S&P is up 24% ytd and up 7% in October. So talk of the coming recession is premature. 

The volume yesterday suggests that there is a change in psyche. While it feels good, I’m just not sure yet that this move won’t be tested. So while it is exciting to watch, do not get drawn in full boat. It’s ok to dollar-cost average, but don’t chase the market with all you got…

Yesterday, I noted that if the S&P pierced its all time high at 3027.98, then it would be off to the races as there was no trendline resistance until we get to 3125! So when we did, and when we pierced that level, another thing happened on the way to the forum. The “MOMO guys” jumped on board. MOMO guys are quant driven algos that respond to technical “breakouts” or “breakdowns” in the market. So when the market broke out yesterday, the algos kick in, driving prices even higher. This creates FOMO (fear of missing out) from investors who have been on the sidelines, causing more buying which then elects a bunch of “buy stop orders.”

(A buy stop is an order to buy stock only when it trades a certain price – which is higher than where the stock is currently trading. For example, you want to buy GE but only if it trades above $10 (that’s where you think it might break out). Currently, it trades at $9. So if GE trades all day below $10 then you don’t buy a share (and you’re ok with that). But if during the day, GE trades at $9.98 and then someone takes the $10 stock, your buy stop order gets elected and becomes a market order to buy stock.

So do you see what happens next? Your order does not have a $10 limit. it becomes a market order and forces the stock to trade higher. So if there were a lot of buy stops, elected at say $10, then all of those orders convert and buy stock at the market sending the stock higher. Then, you have the go-along algos that only exacerbate the move higher. If this happens in the S&P 500 names, then you see what happens? BOOM, the market explodes higher. Then throw in all of the shorts that throw in the towel and become buyers to cover their positions. That only creates more buy volume, and BANG, the market explodes higher. The go along algos jump in and POW, the market explodes higher. By the end of the day, the market makes another new high!

All very dramatic…

This morning, US futures are taking a rest. They are not continuing the surge higher, and that makes sense.

At 5:25 am, Dow futures are down 40 points, S&P futures are off 3, Nasdaq futures are showing down 16 points and Russell futures are off 2 points. 

Suddenly the tone has changed, and what we see are more and more people prognosticating that “this rally has only begun.” Dev Kantesaria, PM at Valley Forge Capital Management, had this to say to the WSJ yesterday:

“We think equities are quite attractive at current prices, given the low-interest rate environment.  We expect that over the long term, the next three to five years, for the S&P 500 to hit new highs.”

He expects that the S&P will hit new highs over the next three to five years? Dude, we are hitting new highs now!

Look for the S&P to digest the move higher yesterday. A retest of 3000 would not be out of the question at all. How investors and traders interpret the FED’s press conference tomorrow will drive the next move. Any word that there will be NO MORE rate hikes this year might cause some angst. But, we are coming into November and December, two usually very strong months for the markets.

Stick with the plan…

European stocks are under a bit of pressure, all off between 0.25% and 0.5% as investors here take time to digest those recent moves to new highs as well. In the UK, PM BoJo lost in his 3rd attempt to force a snap election on Dec. 12,  falling short of the two-thirds majority needed in Parliament. So he will give it another shot and introduce a bill that only requires a simple majority. Feels to me like the Parliament is not interested in forcing a snap election, but what do I know?

Take good care.

Kp


Minestrone

Early Fall Minestrone

A lighter version of the traditional soup.

For this you need:

Zucchini, carrots, onion, celery, potatoes, green beans, plum tomatoes, baby spinach leaves, olive oil, s&p, broth – (Chicken, beef or vegetable – whichever you prefer), Arborio rice – (or ditalini pasta) , fresh basil and fresh grated parmegiana cheese.

So this is a great dish – easy to make, not heavy, gluten free, always helpful when you are trying to diet. – Fills you up without feeling stuffed.

Begin by heating up some olive oil in a large pot – add the sliced carrots, celery, onion – sauté for 5 mins or so.  Now add the beans – cut into bite size pieces, and potatoes –also diced into bite size pieces. Allow to cook for another 3 mins or so.

Now take the plum tomatoes – cut in half and take the core (seeds) out.  Dice into bite size pieces also – add to the pot. Now add the broth – add enough that you have covered everything in the pot by about an inch or so.  Season with s&p – cover and reduce heat to simmer. Allow to cook for a couple of hours. Keep your eyes on it. Add more broth if needed.

Now – make a decision – are you using rice or pasta?  If you want rice – do not use more than 1 cup – otherwise it grows and sucks up all the soup, if you are using pasta – only use about ½ box of ditalini – same reason – it sucks up the soup. (You can always add more broth or even water if it sucks it up.)

Add the spinach now and the rice or pasta.  If using rice – it will need to cook for another 20 mins or so. If using pasta – it will be done in 8 mins or so.

Remove from heat – add the chopped basil, taste for seasoning and let it cool a bit.

Serve in bowls with a drizzle of olive oil and fresh grated cheese.

Buon Appetito.

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Kenny Polcari

Kenny is the editor of Morning Thoughts and has been with Seven Figure Publishing since 2019.

Kenny is a CNBC exclusive contributor appearing on shows like The Halftime Report, Power Lunch, and Closing Bell. His market commentary has reached audiences across the nation on media outlets such as Bloomberg, Fox, ABC, and more.

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