When Leaders Lead the Downside

By | September 16, 2014

Yesterday the market had a soft day, but recent momentum leaders like Tesla (TSLA) and Facebook (FB) had extremely bad days. This showed up on yesterday’s most bearish list of stocks on Twitter. When this happens it shows an aversion to risk that can result in one of two things. First it can simply be profit taking in the stocks that have run the most which causes choppy movement in the indexes as the momentum names are getting hammered. This occurred early this year and caused a few small dips in the S&P 500 Index (SPX), but wasn’t fun if you were holding tickers like TSLA, FB, LNKD, NFLX, AMZN, CMG, PCLN, SCTY, and YELP. If you look below you’ll notice that yesterday’s list looks a lot like (almost exactly like) the names that got beat up badly at the first of the year…which brings me to the second outcome of momentum names failing. If it is a result of a wholesale move away from risk and positioning toward safety it is a sign of a longer term top being put in place.

After Labor Day money managers make decisions on how to position themselves going into the end of the year. Do they have gains to protect? Or do they need to chase gains? If they believe the market is going to run higher they’ll put on more risk. If they feel a need to protect gains they’ll take off risk and raise cash or overweight to defensive stocks. We’re only one day into the current selling, but seeing momentum names get hit hard just after Labor Day (and twice in one year) isn’t a good sign and should provide warning that it might be time to at least take some profit in your high fliers.

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