Avoid This Unproductive Portfolio Mistake as Pullbacks Accrue
It shouldn't be assumed that the pullbacks will gain momentum.
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The small-cap speculation has cooled off on Thursday morning, with the Russell 2000 (IWM) lagging the senior index. Breadth is slightly negative, and 12-month highs are under 200 names. The Magnificent Seven (MAGS) is making up some ground with a jump of 0.7%.
There isn't any significant news flow driving the action. It is just a continuation of the choppy rotational action that has been occurring for the past week.
My focus is on protecting gains while positioning for further upside. That isn't easy to do and it requires tight stops on big movers while simultaneously looking for new setups. I've cut back on some of the most extended names, but most of the sales have turned out to be premature. I'm taking a closer look at stocks that have lagged but may have an upcoming earnings report to boost interest.
The easiest mistake to make right now is to assume that pullbacks will gain momentum. Traders are still very quick to buy dips and are not allowing extended stocks to correct very deeply.
This is a good time to discuss the most important thing you can do to build wealth in the stock market — keep your portfolio close to highs and do not let losses grow too big. Making up losses is one of the most unproductive things you can do in investing. When you lose half of your capital, you have to produce a 100% gain just to return to even. That can take a very long time, and you end up right where you started.
Keeping accounts close to highs is so important because it allows you to benefit from the power of compounding. Many investors think of compounding gains only in terms of an individual stock, but it also applies on a collective basis. You can compound gains in a portfolio just like you can by holding a stock like Nvidia (NVDA) . The key is to keep the account in a position where it can keep making a series of new highs.
That is what is on my mind as I contemplate the current action. I want to keep my accounts close to highs while trying to position in some names that may have positive earnings reports.
One very thin stock I'm currently examining is Duos Technology (DUOT). The chart is attractive, but it only trades an average of about 300,000 shares per day. What is intriguing about the name is that they have a subsidiary that is in the edge data center (EDC) business. An edge data center is a smaller-scale, decentralized facility positioned close to the "edge" of a network. Its proximity to data sources enables faster data processing and storage with minimal latency. It is used for time-sensitive applications like autonomous vehicles.
DUOT deployed its sixth edge data center last week in Waco, Texas, and is targeting a total of 15 by the end of the year. The stock has no coverage and a market cap under $200 million, which leads to very choppy, random and illiquid trading.
At the time of publication, DePorre was long NVDA and DUOT.
