Here’s Why I’m Holding Off on Cheap Stocks Right Now
The banks reversed, breadth is poor and almost nothing is trending up. That’s when buying “bargains” is most dangerous.
Bank earnings received an initial positive response on Tuesday morning, but it didn’t last long. JPMorgan Chase ($JPM), Goldman Sachs ($GS), Citigroup ($C) and Wells Fargo ($WFC) all went from green to red within the first 30 minutes of trading. The reports were generally good, with JPMorgan the only one to miss earnings estimates, but headwinds loom for financials, and investors have little appetite for the sector.
The two-tiered action continues in the broader market. The Roundhill Magnificent Seven exchange-traded fund ($MAGS) is hitting new all-time highs, with money moving into the hyperscalers and out of semiconductors, data centers and a variety of AI infrastructure plays. Cheaper chips are good for the MAG7 names other than Nvidia.
Breadth is poor again at only 37% positive, and new lows already exceed 350. The iShares Russell 2000 ETF ($IWM) is down 0.56%, which puts it back under its 200-day simple moving average.
What My Screens Are Showing
One of the most telling things on my screens is the lack of momentum pockets outside the mega-cap stocks. My screen of stocks up more than 10% today shows just 10 names, and the only one priced above $6 is Enerflex ($EFXT).
Another screen I run shows stocks trading near their highs of the day. When the intraday action is strong, dozens of stocks will be hitting new intraday highs. This morning there are just a handful.
The preponderance of the evidence is that this is a poor market. Some brave traders are trying to catch intraday volatility, and some brave bottom fishers want to nail a turn. But for a trader like me who is interested in positioning for an upturn, there is nothing to do right now.
Late Is Fine
My approach is to avoid buying downtrends and weakness. I don’t try to predict lows. What I want to do is catch positive trending action. I can be a little late to the party, and that reduces my risk. Being late doesn’t matter if I can catch the meat of a move. Better late than early.
The hardest part of this approach is resisting the temptation to buy stocks that look attractive, because they have dropped a lot. It is human nature to think that a lower price means a better value. That works for groceries, cars and commodities, but it doesn’t work with stocks. A stock that is down 50% can easily be cut in half again.
It is far more important to focus on the mood of the market than on valuations, because mispricing can persist for a long time. When the mood shifts, we will see it in the charts, and that is when we can start putting money to work.
Game Plan
I don’t want to sound too negative. This poor action is creating some great opportunities, which is why I keep talking about maintaining a shopping list. A good shopping list lets you be aggressive when the technical conditions improve. I don’t know when that will be, but it isn’t going to be today.
At the time of publication, DePorre had no position in any security mentioned.
