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Michael Michaud
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Michael Michaud is the founder of Invest2Success.com (http://www.invest2success.com/) and the Invest2Success Blog (http://invest2success.blogspot.com/). He has been investing and trading in the financial markets since 1989. He founded Invest2Success.com to empower individual institutional... More
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  • More Momentum Stock Darlings 0 comments
    Apr 10, 2014 7:27 PM | about stocks: AMZN, NFLX, PCLN

    These Momentum Stock Darlings Just Gained the Freshman 15 by Market Authority

    Yesterday, we learned about the "momentum darlings" of 2014.

    Today, let's look at what happens when a momentum darling heads off to college and Ms. Popularity suddenly finds herself surrounded by even more attractive, more popular classmates. Her deflated ego manifests itself in a variety of negative behaviors - overeating, drinking, smoking, etc. These bad behaviors may have short-term positive effects but are simply compounding the long-term problem of low self-esteem.

    After a multi-year run of higher highs and higher lows, the momentum darlings are beginning to reverse the virtuous cycle. We are now seeing lower highs and lower lows, which could mark the start of a vicious cycle for momentum investors.

    A word of caution here. Trading the short side of momentum darlings is very dangerous. Their behavior is entirely erratic and there are periods when the momentum darling moves up faster than she did on the way up. The post dot-com bubble bear market of 2001-2003 were full of rip-your-face-off short squeezes as momentum darlings fought to regain their previous luster.

    And this is exactly what's been happening with AMZN stock lately.

    Stock Chart Microsoft

    After spending 2013 as traders' favorite momentum darling, AMZN looks to have gained the "Freshman 15? in early February. Investors who bought in the late 2013 run-up now find themselves trapped and are using bounces to sell stock.

    A similar development is occurring in NFLX.

    Stock Chart Yahoo

    And here's PCLN.

    Stock Chart Yahoo

    The sharp bounces are akin to a night of binge drinking and the subsequent hangover. While the activity may make investors feel positive in the short-term, it ignores the underlying issue that the momentum darling is no longer the confident mean girl it once was. These behaviors are not leading to higher highs, thus the momentum investor is fleeing in droves.

    As an old drinking buddy likes to impart "There's no problem in the world that can't be fixed with 8 Grey Goose and sodas!" If only that would only help solve the morning-after problem.

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    Stocks: AMZN, NFLX, PCLN
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