Finding Opportunity While Ducking Falling Knives and Anvils
Big tech names are hit again, but rotational action saved the day. here's my best advice for this challenging market environment.
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It was a disappointing market session on Tuesday as the technology sector struggled and the Nasdaq 100 (QQQ) closed under its 50-day simple moving average. A late bounce helped limit damage, but big-cap technology stocks were a sea of red, with Nvidia (NVDA) , Microsoft (MSFT) , and Broadcom (AVGO) all struggling with weak technical performance.
The Valuation Problem
The primary problem is that many of the leading AI names are still quite expensive. Exhibit A was Palantir (PLTR) , which had an outstanding report and huge guidance. It finished with a gain of 6% but well below its opening highs. Momentum investors would typically chase performance like that, but the sky-high P/E kept many of them on the sidelines.
Many other names with very high P/E-to-growth ratios were hit as well, but the good news is that this was not a broad selloff. Money rotated into other areas.
The Russell 2000 (IWM) small-cap index managed a gain of 0.25% while the mighty Magnificent Seven was struggling with a loss of 1.6%. Breadth was 47% positive, but what was most notable was 450 new 12-month highs to 425 new 12-month lows. That is an unusual split, but it illustrates how money is rotating rather than selling everything.
Beware of Falling Knives and Anvils
This poor price action in big-cap technology and expensive growth names is likely not over. There is always a wide gulf between the area where a momentum stock eventually turns into a value play.
Momentum works in both directions and can run much further than seems reasonable. Be wary of catching falling knives and anvils. If you are going to play that game, keep it very small and stay patient.
Finding Opportunity in the Gloom
Despite the overall market gloom, I see plenty of good technical action on my screens. Biotechnology helped to keep the Sharkfolio in the green Tuesday, and there are plenty of interesting opportunities as we await small-cap earnings.
My best advice is to keep the stops tight. If you are caught in something ugly, then make a sacrifice and throw some into the volcano. Sometimes that is the only way to appease the market gods.
Have a good evening. I’ll see you Wednesday.
At the time of publication, Rev Shark had no positions in any securities mentioned.
