Wednesday’s Brutal Market Session Sets Up Great Opportunities for Stock Pickers
Very good stocks that weren’t expensive or technically extended were sold along with many names that are expensive and extended. Here's my game plan.
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Wednesday was one of those days with a long list of extremely bad data. The S&P 500 suffered its worst day since August. Breadth was horrendous, and hundreds of stocks broke support levels.
The catalyst for the move was that the Fed was more hawkish than expected. There are now questions about whether the era of very low interest rates has come to an end. The Fed is only indicating the potential for two quarter-point cuts in 2025. This sent bonds sharply lower and the dollar sharply higher. The market is now going to grapple with worries about inflation and interest rates.
Overall market breadth has been running poor for weeks but one of the most notable aspects of the action Wednesday was the lopsidedness of the breakdown. Only one stock in the Nasdaq 100 QQQ was positive, and only six names in the S&P 500 SPY managed to be up for the day. That sort of action occurs when market players rush to sell index ETFs such as the QQQ and SPY. Investors want to escape and dump the entire market. All stocks are punished to roughly the same degree regardless of their individual merit.
The good news about this type of action is that it creates opportunity. Some very good stocks that weren’t expensive or technically extended were sold along with many names that are expensive and extended. This is the sort of environment that eventually leads to great opportunities for stock pickers who can separate out the quality names.
This market carnage occurs in the context of a very unusual technical action. The DJIA has had an exceptionally long-losing streak, the S&P 500 has more than a dozen straight sessions of negative breadth, the Russell 2000 IWM has been trending down, and only the Magnificent Seven has been holding up the indexes.
If the great bulk of the market hadn’t already been acting so poorly, this meltdown would have a very different look, but because it has been poor for so long, the selling looks more like capitulation rather than a major top. The Mag 7 is in a totally different place than the rest of the market.
Because of the mispricing caused by the ETF selling and the fact that so many stocks have already been acting poorly, there are increased chances that this could set up a Santa Claus rally to end the year. If the rotation into Mag7 reverses and the rest of the market benefits, then many of these poor stocks have a good chance of bouncing at this point.
My game plan is to look for names that sold off too hard and are ripe for a bounce to end the year. Some of these names have also been under pressure due to tax-loss selling, but that may have run its course early due to the technical action.
While it looks quite ugly out there, I’m very optimistic about the stock-picking opportunities during a time of the year when there is often a positive market bias.
At the time of publication, Rev Shark had no positions in any securities mentioned.
