I Was Right About Meta. Here Are the Stocks I'm Watching Closely Now.
This is a very limited bull market that requires a bifurcated trading strategy.
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The S&P 500, Nasdaq, and Nasdaq 100 are hitting new all-time highs on Thursday morning following blowout earnings from Meta META and Microsoft MSFT. The Magnificent Seven ETF MAGS is also at a new high as it awaits earnings Thursday after the closing bell from Apple AAPL and Amazon AMZN.
If you are simply looking at the senior indexes, it looks like a very strong market becoming even more overbought, but under the surface, there is cause for concern. What's most evident is that despite the strength, breadth is running negative. There are around 4,500 gainers to 5,000 decliners. The powerful AI move is not lifting all boats. There is plenty of red out there as money rotates and chases the strength in the mega-cap AI names.
This isn’t a new phenomenon. For much of the last two years, the Mag 7 stocks have driven most of the big gains. The problem is that it is very deceptive, and if you are not aware of what is going on, it is easy to believe that this is just a normal bull market with the vast majority of stocks doing quite well.
The business media does a very poor job of reporting on this because it focuses largely on the indexes. If the indexes are up, then everything is great. However, the reality is that only a very small number of mega-cap technology stocks are driving the indexes, and two of them —Meta and Microsoft — are gunning them higher on Thursday.
The key to dealing with this sort of action is to be extra aware that if you aren’t chasing the Mag 7 names, then trading is likely to be much more challenging. The bull market isn’t going to bail you out. You have to be prepared to deal with poor price action as more money chases the Mag 7 because it is the easy buy.
Back on July 17, I wrote that Meta was the most likely of the Magnificent Seven to have a strong positive response to earnings. That has turned out to be the case so far, and I’m still long the stock, but now what?
I don’t have a large position, so I’ll continue to hold my shares and will wait for a while to see how the chart develops. I expect some consolidation, but this was such a good report that there will be more investors looking to buy. I still believe that Meta is the most likely to outperform from this point. I also believe that Nvidia NVDA will continue to outperform, so that is where my Mag 7 exposure will be.
As for the rest of the market, we will start seeing more small-cap earnings reports in the next several weeks, and there are several names I’m watching closely, including Xeris Biopharma XERS, Harrow HROW, ADMA Biologics ADMA, Sensus Healthcare SRTS, Uber UBER, and Nebius Group (NBIS).
These stocks have to be managed much more carefully because they don’t have the great appeal of the Magnificent Seven. They are not in bull markets and don’t have the power of momentum working for them.
Once you recognize that this is a very limited bull market, it makes it easier to devise a bifurcated strategy that works.
At the time of publication, Rev Shark was long META, NVDA, XERS, HROW, ADMA, SRTS, UBER and NBIS.
Please note that due to factors including low market capitalization and/or insufficient public float, we consider SRTS to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
