Looking to Put Some Cash to Work Now? Here's What Traders Need to Know
I've been using the weakness to my advantage in select areas, but there are key things to understand about wading into this kind of market.
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The indexes are being hit hard on Monday as the yen carry trade blows up, and concerns about a slowing economy are building. Action like this can be extremely painful if you are heavily invested in long positions, but it offers great opportunity if you have a strategy in mind to take advantage of the volatility.
The primary thing to understand about this action is that it is index-driven. There are big sellers of indexes and ETFs, and when those instruments are sold, every stock in the group is also sold. For example, the Nasdaq 100 QQQ is trading down about 3%, as I write, but of the 101 stocks in the index, only about five are in positive territory. Many of the remaining 96 stocks that are being sold are even better values Monday and do not have any change in their fundamentals, but the index sellers don’t care — they just want to escape the market.
Before you start looking for entry points on individual stocks, it is important to understand the nature of this selloff. Is this a major trend change that will eventually lead to a long-and-painful bear market? It is dangerous to try to buy in a severe downtrend, but is that what we have here?
Anything is possible, but my view is that we are just seeing an overdue correction in the big-cap technology names that have become very expensive due to unrealistic expectations about the financial payoff of AI investments. AI is costing much more than most companies have expected, and the payoff is going to take much longer than hoped. Stocks like Apple AAPL and Microsoft MSFT were safe havens for a long time, but their valuations at recent highs were not justified.
The great bulk of stocks never participated in the "fake" AI bull market, so they have much less short-term downside. Groups such as biotechnology have had a little bounce recently, but they are still in a multi-year trading range and have the potential of a boost when the Fed starts cutting interest rates.
If you are going to put some capital to work, then you want to look at sectors that are likely close to some support. I like the small-cap biotech names and used the weakness to add to Mereo BioPharm MREO and ADMA Biologics ADMA Monday morning.
I mentioned adding Nvidia NVDA on Friday, and I will be adding more in the next few days. I believe that infrastructure providers like Nvidia are going to continue to be the main beneficiaries of AI. There is some increased competition in the chip sector, but it still has tremendous growth potential, which justifies its high P/E.
Viking Therapeutics VKTX, which is developing a weight-loss drug, is another bigger-cap biotech name I want to buy. There are quite a few other names I’m looking to add as things develop.
Market conditions aren’t anything like 2000, 2008-2009, or 2020. There was some bubble action in a small group of names, but valuations aren’t crazy. The massive federal deficit is a problem, but inflation now seems to be under control, and the Fed is going to start cutting rates to boost growth. I expect a very positive response from the Fed when they finally start to act.
The key is to make sure you manage positions and have stops in place in case market conditions do not improve. However, I think it’s a good time to do some fishing in names outside of big-cap technology.
At the time of publication, Rev Shark was long ADMA, MREO, NVDA and VKTX.
