Andrew Pyle
March 28, 2024
Fear of Missing Momo
It is appropriate that Easter comes early this year, as investors probably need the break as we close off what can best be described as an eventful, and in some cases, surprising quarter. Given the way that the year started, many felt that the rollercoaster was about to continue after the fourth quarter reprieve and targets were lowered. What transpired was far from the negative outlooks that dominated the landscape that first week.
Only five months have passed since most major equity indices hit bottom at the end of October and the move higher has almost been a straight line. For the S&P500, we are on track to close this quarter 27% higher than that low point, with a new record high to boot. The TSX is up about 18% and the NASDAQ has gained close to 30% or only a thousand points less than the entire loss in 2022. In fact, this rally in North American equities has been even stronger than what we saw coming out of the U.S. mini banking crisis of March 2023.
These impressive recoveries have not come amidst a vacuum of bad news either. In fact, we can almost call the first quarter the “Teflon rally”. Expectations of how much the Federal Reserve and Bank of Canada will trim rates have been cut in half over the space of three months, yet with minimal impact on sentiment. The disinflation forces of last year also seem to be abating and events like this week’s tragic bridge collapse in Baltimore look to maintain upward pressure on prices, due to disruptions in the supply chain. There are three main reasons behind the market’s ability to vault to yet higher levels, despite the headwinds. First, there is a consensus of opinions that the economy is sound. Second, even though investors believe the economy to be in better shape than what normally would happen after 500 basis points of rate hikes, they still believe rates will be cut. Third, there is a ton of momentum.
You have probably heard the term “FOMO” before, which stands for the fear of missing out. This can definitely be tagged to what happened in 2020 when those that had felt shell shock from the pandemic-induced market sell-off, jumped back into the market by late summer for fear of missing out. Well, we now talk about “MOMO”, which refers to an investing strategy that doesn’t look at company intrinsic values or even economic fundamentals, but simply the performance of a security in recent sessions. If it has done well, then MOMO traders see an increased probability that it will continue to do so, and vice versa.
In other words, MOMO can reinforce FOMO, provided the momentum in the market remains. What is interesting is that there is a lack of technical evidence that we are experiencing any greater momentum today than in past recoveries. I apologize in advance for the above chart as it is a little more complex than the ones I typically show, but it is a graph of what is called the MACD indicator or Moving Average Convergence/Divergence. For this chart we are using the S&P500. Without diving into the laborious calculation, it is just the difference between two exponential moving average measurements, the 12-day and the 26-day. If this difference is positive, it indicates that the security has positive momentum. If negative, then momentum is going in the opposite direction. The important takeaway from the chart is that this difference has moved very little, at least in the last two months, and is actually exhibiting a minor down trend.
Another indicator that we can look at is the percentage of stocks that are exhibiting “buy” signals based on where their MACD values are. Right now, just under 80% of stocks on the S&P500 are doing so. That is a high number, but it is still below the levels that we saw right at the start of January and again last July – both close to 90%. If you had used this measure as a cue this quarter, it would have paid off. Back last July, not so much. Therein lies the problem with following just one indicator or acronym, whether it be FOMO or MOMO. Sometimes momentum is halted, to be replaced by volatility.
One example of this would be Tesla, which peaked last July and came close this month to re-resting its lows from last Spring. Momentum indicators were actually starting to turn against Tesla back last June and what’s interesting is that they have started to improve since January. Apple has also seen its momentum fade this quarter. In both cases, there have been fundamental drivers behind the stock prices. Tesla is facing the reality that EV demand is not as spectacular as what was expected, and Apple is dealing with challenges in Chinese demand.
Let’s step back to the general market. There are some who think these five months of bliss can come to a screeching halt. They base this, not on any knowledge of an impending threat but on market behaviour should a minor setback occur. In other words, let’s say a company reports bad earnings, which leads some algorithms to sell. The price action on the stock prompts additional selling across other firms in the sector and then potentially across a broader cross section of companies. We have seen this before many times so it is pointless saying it can’t happen again. However, those “flash” corrections are usually short-lived.
The bigger concern would be a fundamental shift that causes momentum to reverse. Perhaps that is the realization that interest rates don’t get cut at all this year, or it might be linked to a geopolitical event. It may also stem from a trend in certain economic indicators that points to an increased likelihood of recession. It would be easy to fill up this Easter weekend thinking about all the possible negative drivers, but I would suggest not doing so.
There may be a temptation to take some money off the table and go to cash, but we would suggest that diversification is the route to take. If momentum appears to be slipping in larger-cap companies, then maybe shift to companies and sectors that offer better value (in terms of where their stock is trading relative to earnings and cash flow). Investors may look at U.S. small caps for this very reason. In addition, bonds may provide opportunity in front of the long-awaited start to rate cuts. Bottom line, don’t let fear keep you from investing or let it entice you invest, and be careful of staying with the momentum pack too long.
On behalf of the Pyle Wealth Advisory team, have a wonderful Easter weekend.
Andrew Pyle
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Andrew Pyle is an Investment Advisor with CIBC Wood Gundy in Peterborough. Andrew and his clients may own securities mentioned in this column. The views of Andrew Pyle do not necessarily reflect those of CIBC World Markets Inc.
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