What to Do Now as the Market Undergoes a Major Transition
Let's look a how to approach trading now and two stocks on my radar.
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The major indexes are just barely off their all-time highs, but I see a major shift in the action under the surface. Recent leading names are faltering, and investors are searching for new themes and ideas.
The primary issue is that AI names and the smaller stocks leveraged to the theme are undergoing severe corrections. Valuation was ignored for a long time, but now it matters. The best-performing names in the market, like Palantir (PLTR) and Nvidia (NVDA) , have strong numbers and high expectations, but they are now seen as overpriced and technically vulnerable.
Some of the speculative groups like data centers, quantum computers, and nuclear power, which are leveraged to the AI theme, are also correcting deeper. Many of these stocks have no earnings and are trading at huge multiples to their limited revenues.
These sectors will likely bounce as they become oversold, but the critical issue is that they are losing their leadership status. They will no longer be the go-to names for hot-money traders looking for sustained momentum. They will be bounce plays for shorter-term traders, and are passive holdings for very long-term institutional holders.
So, where does the money coming out of these names go?
In the last few days, it went into some big Dow Jones industrial average names. Financials and pharmaceuticals benefited the most, and biotechnology also did well. But when transitions like this take place, there is typically a lull period before new leadership becomes clear and asserts itself. Sectors like money center banks are never leaders for very long, as they do not have exciting growth. Biotechnology is a good candidate, but the issues at the Food and Drug Administration have made it more difficult for this group.
The most important thing to do now is to protect capital. If in doubt, get out. You can always rebuy. If you are comfortable with what you own, then manage it closely and don’t let losses build. Err on the side of selling rather than buying.
It is extremely important not to keep trying to catch lows when these stocks break down. The data centers are particularly interesting for bottom fishers currently, but keep those stops tight and don’t average down if you are wrong.
The third step is to monitor the action for new leadership. My scan of the market shows very few stocks moving up significantly on increased volume. There are some random names, but no clear sectors or themes.
Don’t worry about being late to the next party. There will be plenty of upside potential when new leaders emerge. It may take a while, but there will be plenty of stocks with significant upside as the transition gains steam.
Currently, there are two names on my screen that I see as being in strong themes. One is Harrow, Inc. (HROW) , which sells ophthalmic products, and the second is Duos Technology (DUOT), which is involved in edge computing. I’ve discussed both of them in the past, and they both posted very good earnings reports in the past week. DUOT is very small and unknown, but it is in a great niche of quickly building small AI power plants in rural areas.
The most important thing you can do right now is to embrace the fact that the market is undergoing a shift in character and that will require adaptation. Don’t just keep doing what you did in the past. Things have changed.
At the time of publication, DePorre was long HROW, DUOT.
