The stock market has experienced a significant shift in its reaction to news. In the past, bad news was seen as good news, leading to rallies. This trend, triggered by former Federal Reserve Chair Jerome Powell in November 2022, persisted until mid-July 2024. However, the market has now shifted to a more traditional interpretation – good news is good news, and bad news is bad news. This shift reflects a growing awareness that bad news negatively impacts earnings.
While this change in market behavior is positive for long-term investors, it’s crucial to be aware of the impact on the so-called “momo crowd” – investors driven by momentum and hype. The momo crowd is still optimistic about upcoming economic data, expecting a strong rally. However, they have recently suffered heavy losses due to margin calls and expired options, diminishing their buying power.
Prudent investors need to be cautious and avoid relying solely on the momo crowd’s optimism. Instead, they should consider a protection band, which involves holding cash or short-term investments alongside hedges to mitigate potential losses. A protection band allows investors to participate in market gains while safeguarding their portfolio.
Investors should also pay attention to money flows, particularly in key ETFs like SPY (SPDR S&P 500 ETF Trust) and QQQ (Invesco QQQ Trust Series 1). Positive money flows in these ETFs indicate a strong market sentiment.
Furthermore, investors can gain a significant advantage by understanding the movements of smart money, which often invests in gold, oil, and stocks.
While the current market sentiment is bullish, investors should maintain a balanced approach, considering both risks and rewards. A protection band strategy and a focus on smart money flows will help investors navigate the shifting market dynamics and make informed investment decisions.
