10 Ways I Handle an Ugly Market (Including the Great Sacrifice)
Here’s my strategy for days like this, including how I make a shopping list, buy and take profits.
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It is ugly out there again, with breadth running about 41% positive and the Nasdaq 100 (QQQ) leading to the downside with a loss of 0.6%. There are almost no pockets of speculative momentum, with just a handful of names up more than 10%.
The most important statistics on my screen are 46 new highs to 226 new lows and 58% of stocks trading below their 200-day moving average. Those are not typical readings for a market where the Nasdaq and S&P 500 are barely off their all-time highs. Those are the readings you expect to see in a developing bear market.
The disparity between the indexes and the average stock is extreme, and what makes it worse is that many folks are fooled by the indexes and fail to understand that the market is not healthy. If you understand that there are problems, then you are more selective with your buying and have greater patience. In a broad, rising market you can afford to be more aggressive with new entries because the market will bail you out. You can’t count on that in this environment. If you make a poor buy, you are likely to pay for your mistake.
This poor market environment has been developing for a long time, and my biggest mistake was not seeing how long the indices would cover it up. When the indices stay strong they boost sentiment, and when sentiment is positive it prevents the poor price action that moves us to a washout and lower support levels.
My Strategy in This Market
I want to talk a little bit about my strategy in this market environment. The first step is that I maintain a shopping list that ranks my favorite stocks. What differentiates my approach is that I always buy incrementally. I try to be in a position where I can take advantage of weakness in the stocks I like best. I build up those positions when I can, but, and this is important, I trade them in different time frames so that I can control the position size. If I catch a good entry, I’ll take some partial profits quickly and then look to rebuy.
The Shopping List
My three favorite names right now are National Energy Services Reunited (NESR), Precigen (PGEN) and Xeris Biopharma (XERS). I have positions in all three and would buy substantially more if they give me the opportunity.
On the second tier are names I’m just starting to build. BridgeBio Pharma (BBIO), Delcath Systems (DCTH), Harrow (HROW), Abivax (ABVX) and Protagonist Therapeutics (PTGX) are good examples. I’m making small buys in these names on sharper pullbacks, but I don’t want to really build them up until they start finding some support. With market conditions this poor, I am in no hurry to buy, because the selling pressure doesn’t care about fundamentals or valuations.
In some cases, when there is a sharp drop in a stock I like, I will make sales and then watch to see if there is a reason to re-enter. Two examples are Cullinan Therapeutics (CGEM) and NeoVolta (NEOV). NeoVolta had a poor earnings report. The company is pushing to bring a new factory online, and there is promise but also many obstacles. I reduced my position and will watch to see how it develops from here.
Throwing a Virgin Into the Volcano
One tactic I use in a poor market is what I call “throwing a virgin into the volcano.” I make a sacrifice to the stock market gods. I will sell some of a good name despite my reluctance to take a loss. I don’t know if it works, but I find that it helps me mentally. I no longer struggle with the decision about what to do. I just hope the market gods will reward me in some way down the road.
This Is Just the Downcycle
Another thing to keep in mind is that this action is just part of the normal cycle. It is the downcycle that creates the next crop of opportunities. They are being created right now, and all we need to do is patiently wait for them to develop and then make a series of well-timed entries. The upcycle will come eventually, and if we have made some good choices, it will pay off.
At the time of publication, DePorre was long NESR, PGEN, XERS, BBIO, DCTH, HROW, ABVX, PTGX, CGEM and NEOV
