The momo (momentum) crowd followed the stock market higher from support to resistance, ignoring President Trump on the trade war.
Now the momo crowd is finding that Trump is aiming to win the trade war. Following the momentum and ignoring the risks of the trade war is not a prudent strategy.
Think twice before following the momo crowd if you are a prudent investor. The momo crowd often gets whipsawed. Let us examine with a chart.
Read: How to avoid a trade war: Just walk away[1]
Chart
Please click here[2] for an annotated chart of S&P 500 ETF SPY, -0.73%[3] Similar conclusions can be drawn from the charts of Dow Jones Industrial Average DJIA, -0.88%[4] Nasdaq 100 ETF QQQ, -0.51%[5] and small-cap ETF IWM, -0.85%[6] Please observe the following from the chart:
• The chart shows the trend line that has acted as support three times.
• The chart shows the resistance that has previously stopped the stock market advance three times, excluding this attempt.
• The chart shows the momo crowd buying ahead of the $16 billion of tariffs going into effect.
• The chart shows the momo crowd buying when the tariffs were actually imposed and on the jobs report. The jobs report was better than the consensus numbers but in line with the whisper numbers.
• The chart shows round-robin buying. In round-robin buying, stocks in Asia were bought because stocks in the U.S. were up. Stocks in Europe were bought because stocks in Asia were up. Subsequently, stocks in the U.S. were bought because stocks in Europe and Asia were up. Yes, this sounds silly, but that is what the momo crowd often does.
• From the chart, please note that the momo crowd ran up the stocks from support to resistance.
• The chart shows new tariffs coming into the picture as the Trump administration releases a list of goods worth $200 billion for new tariffs on Chinese goods.
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