Why I Might Cut This Stock as I Look Below the Surface for Trades
Here’s why I look below the indexes for true opportunities, and why I might shed this holding today.
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The indexes are lower on Wednesday morning but is this something to worry about? Is this a sign of a significant shift in market character? Maybe, but the indexes alone won’t answer that question.
I wrote an article this past weekend about how misleading the major market indexes can be. The worst thing about the indexes is that they foster binary thinking and create a good/bad thought process. If they are up, then the market is good and if they are down, then the market is bad. Of course it isn’t that simplistic and more importantly, the greatest opportunities in the market have little relationship to the indexes.
Look Under the Surface for Trades
If you want to find the best opportunities you have to look under the surface. You have to understand where money is flowing and what the most aggressive traders are doing. So how do we do that?
On Wednesday morning the indexes are trading lower as oil and interest rates move higher. There is obviously some concern about how the Iran situation is dragging out and there is also some worry about how frothy several areas of the market have become.
I’ve been talking about potential negative catalysts like massive IPOs and growing concern that the Fed may need to raise rates rather than cut them. There are plenty of good excuses for some market downside but the question is when the market will care and how a shift will manifest itself.
The 10% Mover List
Let’s look under the surface. I run software that sorts market action in various ways. One thing it does is generate a list of stocks that are up more than 10% or some other defined metric.
The 10% mover list is my best measure of speculative interest. We have had several days recently when a large number of stocks made substantial moves. Today, the list of 10% movers is only a couple of dozen names, and most of them are priced under $10. I’ll watch to see if that shifts but currently it looks like the momentum chasers have moved to the sidelines. Semiconductors have been leading the list lately but today they are not showing up.
Stocks Near Their Highs
A second scan I run shows stocks with big moves and how close they are to their intraday highs. In a market with strong momentum, there will be many stocks near the day’s highs that keep pushing higher as fear of missing out develops. If there is selling into strength, there will be few and so far early on Wednesday there are few close to highs. They shift quickly but one example at its highs is Neurocrine Biosciences (NBIX), which is on my buy list. Another is the Defiance Daily Target 2X Short PLTR ETF (PLTZ), the two-times inverse of Palantir Technologies (PLTR).
What the Action Says Today
Things can shift quickly, but the action under the surface on Wednesday is that there is broad weakness and the pockets of speculative momentum are drying up. That may just be a healthy pause after some frothy action or a warning shot of something more dire. I don’t know, but I do know that I’m not going to rush to buy anything when these conditions exist, and I’m going to cut a few things if they don’t recover by the end of the day. A good example is Roku (ROKU), which is down about 4%. I like it fundamentally but I don’t like the price action so I may take a stop if it doesn’t look better at the close.
At the time of publication, DePorre was long ROKU.
