Investors Are Nervous. I’m Getting Interested.
Dislocations driven by market conditions rather than fundamentals are creating my shopping list.
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Investors had good reason to be nervous about the reaction to earnings in the AI sector. Alphabet (GOOGL) beat on both the top and bottom lines and had great margins but the stock is down around 7% and is now trading under its 200-day simple moving average. The entire Magnificent Seven group (MAGS) is down 4.5% with a negative reaction to Tesla’s (TSLA) earnings contributing to the problems.
Unfortunately these earnings reports are hitting at the same time as a sharp spike in oil and interest rates. That issue alone would have been a problem for the market, but now we have two big negative themes feeding on each other.
Breadth is running about 32% positive, which is poor but not terrible. There is some rotational action in industrials, health care, and energy that is helping. This is not a “dump everything” market so far.
Interestingly, there are only about 140 names hitting new 12-month lows, which illustrates the fact that there has been plenty of rotational action with few sustained sector breakdowns. In a real bear market those lows would be piling up quickly but that is not the case. While that can change there are signs that investors are focusing more on rotation rather than dumping everything and raising cash.
We had one brief bounce try so far but the S&P 500 is back near day lows. The close will be particularly important and I would not be surprised if we finished poorly and saw some more pressure in the next few sessions.
Game Plan
This is exactly the sort of action that I have been waiting to see. We are getting dislocations in many stocks that are being taken down by market conditions rather than fundamental concerns. Thinner stocks are suffering from a lack of liquidity and strong valuation doesn’t matter.
I see plenty of names that are pulling back that I would like to buy, but the key is timing. Investors consistently make the mistake of buying pullbacks too big and too fast. They end up with too much capital tied up and then panic sell when there is no immediate bounce. That is what wipes out more traders than anything else.
The cure for that problem is to be incremental when making buys and focus more on buying strength rather than weakness. You do not need to time the exact bottom to make a good buy. In fact you are likely better off not trying to do that. I like to say “better late to the party, than early.”
Two names I’ve started building are Ondas Holdings (ONDS) and TeraWulf (WULF). There are quite a few biotechs that I plan to be aggressive with such as Candel Therapeutics (CADL), Precigen (PGEN), Xeris Biopharma (XERS), and Cullinan Therapeutics (CGEM) but, again, I’m moving slowly at this point.
Though a lot of folks are taking hits and feeling quite stressed, I’m growing increasingly optimistic about the opportunities that are developing.
At the time of publication, Rev Shark was long ONDS, WULF, CADL, PGEN, XERS and CGEM.
