Market Starts to Roll Over as Dip Buyers Step Away
Strong markets tend to stay sticky to the upside. I haven’t written that in a while, but the action on Wednesday is a good example. The senior indices are up for the fifth day in a row but breadth is slipping and there are some signs of increased profit taking.
Stocks don’t suddenly collapse after a strong run unless there is a surprise news development. FOMO puts a bid under the action. There is a tendency for underinvested longs to buy shallow pullbacks. They don’t want to chase the top tick but they are willing to buy small dips. Psychologically, it doesn’t feel as undisciplined if there is some sort of pullback even if the stock is still overbought.
I’ve been “adjusting” some positions that have had good runs and reducing a little exposure for some names with earnings reports coming up. My mindset is to try to keep accounts as close to highs as possible.
I’m focused on building a watch list of names that have had good earnings reports and are now bouncing around as we wait for the next round of catalysts. We are entering a seasonally slower time of the year so many of the stocks that have had good reports may drift lower in the weeks ahead.
Where Opportunity Comes From
The market does not price stocks efficiently and therein lies the great opportunity for traders.
A good example is Precigen ($PGEN) which had a strong report. I believe that fundamentals support a much higher price (you can find my complete PGEN report here).
However, the stock ran up quite a bit into the report and that will almost always trigger some “sell the news” action. The selling will sometimes scare out folks that think that they missed something about the stock. This name goes near the top of my trading list in the months ahead. It is going to bounce around due to standard volatility but since I’m confident about valuation, I can trade it aggressively and take advantage of that movement.
The tone has shifted since I started writing. The market is rolling over and the profit taking is picking up. Breadth is now solidly negative and the dip buyers are stepping away.
My best advice right now is to focus on keeping accounts close to highs. Err on the side of selling. You can always buy them back.
At the time of publication, DePorre was long PGEN.
