Narrow Large-Cap Strength Is Back — Here's My Best Trading Advice

The major indexes are hitting new highs on Wednesday morning, but under the surface, we have a return to narrow large-cap leadership. The Magnificent Seven (MAGS) is leading with a gain of 0.5%, while the Russell 2000 IWM has a loss of 0.7%, and breadth is running 3,200 gainers to 5,500 decliners.

What is happening is that the folks who want to put more cash to work at this point feel that there is greater safety in the big-cap favorites such as Nvidia NVDA and Tesla TSLA because they have relative strength. Valuations are not important in these names as long as they have favorable price action. 

There is no interest in more speculative stocks right now, especially because of the risk of negative seasonality. We have seen a good example of that in biotechnology IBB, which is down another 1% and has dropped almost 5% in the last four days.

The strength in the indexes causes the media to be very upbeat about market conditions, but for aggressive traders like me, this is not attractive action. On my scans, there are only a dozen stocks that are up more than 10%, and there aren’t any compelling charts. There are a few names, such as Cipher Mining CIFR and Rocket Lab RKLB, doing well but it is extremely narrow.

My favorite part of trading is the hunt for great stocks, but great picks need good market conditions for them to work best.

Many technicians see the indexes hovering at highs and refusing to pull back and conclude that technical conditions are quite strong. Yes, the indexes are doing well, but I trade individual stocks, and currently, the stock picking is very poor. I have my shopping list of names, but none of them are set up in a manner that makes me want to buy aggressively.

One of the most important aspects of trading is knowing when it is better to do very little. If you are staring at the screens all day, you are constantly tempted to do something even when market conditions aren’t so great.

The good news is that if we do see more corrective action now, then it will be a great setup for some end-of-the-year strength.

My best advice right now is to stay patient and don’t be seduced by index strength. Focus on the charts of individual stocks and wait for good entry points to develop. It may be boring and frustrating, but I can guarantee that conditions will eventually change.

At the time of publication, Rev Shark was long NVDA, CIFR and RKLB.