Follow momentum and leadership

Avoid shorting 52-week high stocks and do not be tempted to catch any “falling knives” for now, says Riccardo Ronco, Head of Technical Analysis at Aviate Global in London.

A look at the ratio between the DJ High vs DJ Low Momentum index continues to trend higher, “confirming the view that this market is rewarding breakouts and breakdowns.” See chart 1.

Ronco says, “As long as this ratio moves higher, investors should favour following leadership to the upside without considering “buy on dips” trades. Avoid shorting 52-week high names. Laggards are not rewarded – they continue to lag hence remaining perfect shorting candidates. Do not be tempted to catch any “falling knife” for now.”

This view is matched by the lagging performance of the most shorted names (chart 2), which shows the relative index hitting new multi-month lows. Ronco says this means that the most shorted names are indeed going down in spite of the overall medium-term uptrend in equities.

See chart 1 and chart 2.