Rising U.S. stocks could quickly reverse themselves on the slightest shift in momentum
There are two pieces of news on the U.S.-China trade deal for investors to know today. First, China is promising more protection for intellectual property. Second, despite contradictory media reports about a trade deal, there is some credibility to Gao Lingyun, an expert who is apparently close to the trade talks, saying that the “two sides have reached a broad consensus” for the first part of an agreement. Wall Street is optimistic. Stocks are up — at a new record, in fact. How should investors think about these positive reports on trade? The momo crowd is buying simply because the market is going up. The market is going up on performance chasing by money managers going into the year-end. However, this can quickly end on the slightest shift in momentum, as money managers may decide to lock in profits. There is a mistaken belief that popular large-cap stocks such as Apple, Amazon, Facebook and Microsoft are safe. These stocks carry a heavy weighting in indexes. If the market sells off, the selling will first start in futures and ETFs. The large-cap stocks will be sold irrespective of their individual merits. Semiconductor stocks are leading indicators. Consider carefully watching stocks of Intel, AMD, Micron Technology and Nvidia NVDA. Also keep an eye on gold and silver. Which are seeing selling on the news from China. If there is a reversal in precious metals to the upside, that may be an early sign for more caution on the stock market.