Here's My Strategy for New Buys as the Market's Character Shifts
Conditions are different this time, and the risk of a failed bounce attempt is higher. My strategy is now focused on these stocks.
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The sort of market action we're seeing now creates mispricing, especially in smaller stocks.
After some brutal action on Tuesday, there is a very feeble attempt at a bounce on Wednesday morning. In recent months, the market has consistently bounced back very nicely after a bout of ugliness, so you can’t blame the dip buyers for trying; however, conditions are different this time, and the risk of a failed bounce attempt is higher.
The character of the market action has shifted because AI is no longer a clear leader. The slowing price momentum lends weight to the argument that valuations are excessive, which means more folks will look to lock in gains on any bounces. In other words, there is now overhead resistance, and if stocks can’t overcome it, then selling will accelerate.
We’ll see how things develop as the day progresses, but I’m not going to trust a bounce at this point and won’t chase strength.
My strategy at this juncture is to focus on solid stocks that are being dragged down by overall market weakness. I want to find names with solid fundamentals and good valuations that are being sold because they are thin or underfollowed, and no one cares right now whether they are cheap or not.
One of the reasons I focus on smaller stocks is that they are much more likely to be mispriced than the big-cap names that have dozens of analysts covering them and plenty of media coverage. I have no edge in trading a stock such as Palantir (PLTR) , but I may have one in less well-known names.
Two examples on my screen right now are Flotek Industries (FTK) and Emergent BioSolutions ( (EBS) ). Both names had very strong earnings reports in the last few days, but are trading lower. The main reason they are trading lower is market conditions, not fundamentals. After their earnings reports, both are even better values, but buyers see the weak action and assume that there is a problem with the stocks rather than with the stock market.
Bitcoin (IBIT) and Ethereum (ETH) also look like situations I want to monitor closely for rebound action.
I don’t want to rush in and buy these names immediately, however. I want to see them find support and build better charts. I keep them on the radar and will track them. When market conditions improve, I’ll start ramping up my position.
There are dozens of stocks like that right now, especially in the biotechnology sector, which has been brutal due in part to issues at the FDA.
There is a little better dip buying as I write, but the market close will be very important. The big question right now is whether the folks looking for an opportunity to escape the market outnumber those who think this is just another dip buying opportunity.
At the time of publication, Rev Shark was long EBS, FTK and IBIT.
