What is momentum? What feeds it? How does it work? Why is it so magical? How can stocks seemingly keep running, like the Energizer Bunny, on their own glide path with nothing new happening, snatching adherents as they rally?
It's a good question to ask on still one more day when the averages continue to rally.
Momentum is a tricky, and ethereal thing. It's really much easier to say that stocks are going up because we didn't have World War III after the assassination of a top terrorist general in the Iranian army. We can posit that had the Iranian missiles hit targets, maybe everything would be much different.
We could suggest that the reason for the run is the strong employment numbers we have first from ADP, the payroll processing company, and then the weekly employment claims Thursday, or perhaps a run ahead of the coming non-farm Labor Department monthly employment figures.
Or we could say that people are buying stocks in expectation of the good feelings breaking out between the United States and China, where we get to keep more than $300 billion in tariffs, while we get the Chinese to agree to terms that might include large orders to American businesses.
You know what, though? I am not buying it. All of those big macro issues do matter. I am not dismissing that. Yet, they do not create momentum in and of themselves.
What is momentum? Away from stocks, I would say momentum is the ability for something to keep moving ever faster than thought to where it is gaining strength as it goes.
Similarly, the definition in the stock world is simple: The stocks of companies going higher for emotional reasons not financial reasons. A stock goes higher because there are buyers who want in at whatever price they have to pay, because they see the strength and they do not want to be left behind.
Now, importantly and candidly, this is not the kind of buying I would like. In fact, I am not a fan of momentum buying, although I always tried to anticipate momentum and get in early while I was at the hedge fund. But this isn't something I encourage, because when the momentum stops, you are pretty hung. It makes my job more difficult than most, because as you can imagine, when I say wait for a pullback, a pullback is an anathema to a momentum buyer who may not even know what the heck he is buying and will bolt because of a pullback. This is because a pullback per se means a loss of momentum. It means that the rocket ship could crash, so get off the rocket ship ahead of time.
What I want to see is a change at the company not a change at the stock, especially a change in earnings. When I see earnings estimates raised I know I am not overpaying because when you buy a stock you need to believe that the earnings are going to be better than expected or you are not going to get a rally that has staying power. Let's call that "good" momentum.
But there's another kind of momentum, the kind we are having now, and that's suspect momentum. It's the kind of momentum that is led not by the company, but buy analysts who cover the company. That's the kind of momentum we are enjoying now. Today was textbook of what I would regard as not wrong, but frivolous momentum. It's the kind inspired by analysts who have been recommending stocks using price targets and the stocks have gone higher and higher to the point where they are to or through the price target.
Given the targets were set usually at the time of the last earnings report, they represent where an analyst thinks the stock should go. So when a stock exceeds that target, you would expect the analyst to say, "OK, we have gotten there, time to go to a hold and ring the register."
That's called a valuation downgrade, and we have had a few of them since the year began. They make sense, particularly if nothing is happening at the company except its stock keeps going higher.
We have the exact opposite move for many others, though. We have price targets bumped galore, because they have already been exceeded and the analysts are simply playing catch-up.
Let me give you some examples of both good momentum and frivolous momentum -- as well as good security analysis vs. flawed security analysis.
Let's start with Apple (AAPL) . Here's a stock that's been outrunning virtually every analyst's price targets. Good or frivolous?
The answer is good. Why? Because in the last two days, we have had specific information that indicates that Apple's number could be much better than expected, and these price target bumps are reflecting that possibility. Sure, you could argue they are just raising price targets because the stock has exceeded them, but that's not fair to the analysts. Yesterday we found out that the retail and app stores of Apple are performing sharply better than expected. That means numbers are better. We got news Thursday that China is performing sharply better than expected. That's also a shocker, especially given that the short-fall pre-announced a year ago was directly related to a severe slowdown in China. I trust these kinds of price targets.
Now, I don't mean to pick on any one analyst, but we had several bank stock upgrades Thursday, and they are in the frivolous camp. As I read them over and over, I don't see anything in the multiple price target bumps that makes me think anything has happened at all. I mean nothing. In fact, one of my biggest fears about this market is that the banks may not even make the numbers when they report next week. Even though my charitable trust owns Goldman Sachs (GS) , I am astounded at the love being showered on it now, much of it, I think, because the stock is exceeding targets.
I have seen the same thing happen in with some of the FAANG names, particularly Facebook (FB) , that are particularly egregious. Why? Because the only thing that I have seen of note is Mark Zuckerberg's predictions posted this very Thursday afternoon on his page. As the stock goes higher, the analysts are just bumping price targets to stay ahead of the Facebook buying posse.
The worst I have seen? Thursday's upgrade of Advanced Micro Devices (AMD) . Now, I know I have changed my rap going into 2020, the decade where I vow to be sweeter, the decade of Jimmy Chill as I like to say on Twitter, but I have to draw the line on this Jefferies upgrade of Lisa Su's company -- made when the stock's now run to $48, up from the low $30s, since it reported. Yes, AMD has executed on its new chips, truly, the demand environment is strong and the competition from Intel (INTC) remains subdued, but I would argue nothing else has happened. This is late-to-the party momentum with little rigor to speak of.
But then again, I know how tough this price target business can be. In fact, the most rigorous piece of research Thursday came from a long-running bull on Tesla (TSLA) , Ben Kallo from Baird. This man has liked this stock all through the battles with the shorts and recognized far before many that founder Elon Musk has developed something new and different and the market just didn't see it. When the stock was much lower, he had a $355 price target on it. Now that the stock has roared to the $460s, he had no choice but to raise his price target and he did so, taking it to $525. But he went from a Buy to a Hold, and moved to the sidelines simply because he said the market now recognizes what he saw before most.
I don't have to worry about price targets. I think Tesla is going to stay a good situation for a long time. But I salute Kallo that for the value he provided in navigating this battleground and this is research at is best. Kallo loved it lower, he doesn't love it as much now. He doesn't hate it or he would not have raised his price target and he urges people not to short it. But he's made you the easy money, and that's always the best kind to make.