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Investors: Beware the Big, Round Numbers!

Momentum stocks can wither after crashing through landmarks


Since consolidating and trading in a range for most of 2011, (NASDAQ:PCLN) proceeded to break out above the $550 level in early February. Since then, the stock has more or less rallied 16% in a straight shot and right up above the psychologically important $600 mark.

Momentum stocks such as, Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) have a tendency to break out of long-standing consolidation phases and quickly accelerate toward big, round price targets.

Big-name stocks such as these are most often littered with momentum investors that jump on the bandwagon, and they don’t get out until a major reversal becomes apparent. Momentum hedge funds and other players are attracted to these big-name companies, as the stocks offer plenty of volume and hence liquidity for larger players to trade. The problem arises once the upward momentum stops and meaningful reversals become apparent. At that point, these quick-hand momentum investors all jump the ship, simultaneously causing the stock to fall hard in a short period of time.

Because of the momentum players involved, these stocks also tend to blow right past the big, round price targets — but eventually lose their strength and begin to slip. yesterday leaped above the $600 mark, which increasingly smells of a blow-off top. However, until a clear reversal day is in place, momentum investors will stay aboard, and the stock could run into $650 or even $700. Once a reversal day becomes clear, one would expect a trade back down to the February breakout point (around $550) at the very least.

Netflix (NASDAQ:NFLX) last year displayed one of the more spectacular reversals as it rallied 71% from January until July 13, at which point a reversal day kicked in followed by a big red bar (confirmation day) the following day. The stock closed the year down about 60%.

Google had its intermediate blow-off top in 2007 when the stock powered higher out of a small base and finally had a big reversal day on Nov. 8. From there, the stock corrected 44% in four months.

Apple consolidated in the second half of 2011 only to sharply break out of the consolidation area in January of this year. Since then, the stock has literally gone vertical and rallied 25% in five weeks. While it remains to be seen what the intermediate topping level will be, it is certainly getting frothy here from a price momentum perspective (while valuations remain attractive). A key reversal day/week will signal an intermediate top once it arrives.

As of this writing, Serge Berger did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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