I’d Rather Buy Strength Than Guess at Bottoms
Most of the action is traders trying to call a turn in broken AI names. I’m holding cash and watching stocks acting well, like this one big name.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
I’ve been looking for new buys on Wednesday morning, and I’m not finding much. Most of the trading action out there is folks trying to catch a turn in broken AI names.
There is a bounce in the data-center names and Nvidia (NVDA), and the Invesco QQQ Trust (QQQ) is up 2%, but breadth is only slightly positive at 53%, and the Dow Jones Industrial Average is in the red.
The Comfort of Familiar Names
Many investors are focused on trying to call a bottom in broken stocks. There can be some sizable oversold bounces in these names that are tradable, but I question whether it is the best way to find new longer-term positions.
I suspect much of the interest in the broken AI and chip names is driven by familiarity more than anything else. Everyone knows these stocks, and that familiarity makes it more comfortable to buy them even when the price action is poor. Nvidia was $240 a month ago, and it feels like a bargain at $167. The chart doesn’t care what it used to cost.
My bias for longer-term buys is to focus on stocks that are showing relative strength. The stocks that hold up best during a correction are usually the ones that lead when the market turns.
Institutions that keep buying a stock while everything else is being sold are telling you something. I want stocks that are developing momentum both technically and operationally, and I find it much easier to trade trends than to try to time turning points.
Why I Favor Amazon
In the Magnificent Seven group, my favorite stock isn’t Nvidia, even though it is cheap. It is Amazon.com (AMZN), because it is relatively strong and has clear support and resistance levels.
Amazon is trading in a narrow range, with support around $265 and resistance around $274. It held above its 200-day moving average through the worst of the recent selling and recovered quickly from a negative reaction to its earnings report. A move over resistance should attract momentum and breakout buyers. Investor’s Business Daily highlighted the stock as technically attractive because it appears to be building the right side of a cup, with a breakout point at $287.20.
The setup also gives me a defined risk level. Support is only a few points below the current price, so if it breaks, I know I’m wrong and can step aside with a small loss. There is no comparable level in a stock that has been falling for a month.
The business supports the chart. Amazon Web Services is growing at about 40%, and Amazon owns the kind of data-center capacity that becomes more valuable as new construction gets harder. Amazon is also estimated to own 15% to 20% of Anthropic, a stake that could be worth roughly $210 billion to $280 billion at the top of the IPO range. That is a nice potential kicker for the stock and should get more attention when the IPO hits.
Amazon is slightly lower Wednesday while the broken names bounce, and that doesn’t bother me. Bounce money isn’t the money that holds a stock in its range.
Game Plan
I see little of interest on my screens right now. I’ve raised my cash levels and cut a number of positions. This is more of a mental adjustment than anything else. I want to be ready to move aggressively when market conditions improve and new leaders emerge.
Currently, the main strength is in bottom-fishing broken stocks, and that is not my definition of a healthy market. I have no interest in buying a stock just because it is a lot lower than it was a few months ago.
At the time of publication, Rev Shark was long AMZN.
