Here's a Guarantee for Investors in This Crazy Stock Market

The market started the day on Tuesday morning with strength in semiconductors and the Magnificent Seven names, while the rest of the market struggled and overall breadth was negative. This narrow strength has been a theme for so long that I’ve lost track of when it started. A small group of big caps is becoming more and more extended while the rest of the market languishes.

The pundits in the financial media tend to ignore the very weak internal action and simply celebrate the fact that the indices are higher. In the world of financial television, if the indices are higher, then it is positive no matter what else is happening.

The reality is that this is a very hard market to trade. Big-cap technology and semiconductors have tremendous momentum, but they are not only technically extended, but are becoming quite expensive on a fundamental basis. That doesn’t mean that they can’t go much higher, but the risk/return ratio is skewed, and many prudent investors are starting to cut some allocations to the group.

In normal bull markets, the big-cap names that are doing the best are leaders that help the rest of the market. Investors look for smaller names that have been ignored, and they hope that the rising tide will lift all boats.

In this market, the big-cap names have been the opposite of leaders. Money has flowed out of the rest of the market and piled into this small group of names. This has created some very good opportunities, but so far, investors who have tried to put money to work in smaller stocks have been the victims of poor price action.

The nature of markets is that disparities are eventually resolved as stocks "revert to the mean." That means that, at some point, big caps should start to underperform while smaller stocks outperform.

The theory may be fairly simple, but the timing is a huge challenge. A small-cap value play may go unrecognized for years while money continues to pour into a favorite name like Apple AAPL.

There is only one solution to this dilemma: patience and vigilance. The one great certainty of all markets is that the cycles eventually will switch. We don’t know when or how, but when it does occur, a new cycle will develop and if we are positioned at an early stage, then we will do very well.

It is important not to try to time cycles with great precision because you can only do that prospectively. It is better to react quickly as conditions change but be ready to abandon the trade if there is a failure to follow through.

This is not easy. The reason that traders can generate great wealth is that it is extremely difficult. The key is to stay patient when market conditions are crazy like they are now and to prepare yourself mentally to be ready when the inevitable change occurs. I don’t know when this market will shift, but I guarantee that it will.

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At the time of publication, DePorre had no positions in any securities mentioned.