These Two Stocks Illustrate Trading Tensions in an Uncertain Market
I've been investing in these two names -- one with strong fundamentals but performing poorly and another that's the exact opposite. Here's why.
You're reading 0 of 1 free page.
Register to read more or Unlock Pro — 50% Off Ends Soon
New York Stock Exchange Wall Street NYSE Lead (RD 101525)
Monday's late-day excitement, triggered by Pres. Trump's indications that the Iran war would wind down quickly, is cooling off on Tuesday. Brent crude is again climbing after yesterday's sharp decline and trading around $92, reflecting continued uncertainty about whether the de-escalation signals will hold. There are no major new developments out of the Middle East this morning, but the market is in a more sober mood, with investors stepping back from Monday's enthusiasm and contemplating the many obstacles that still lie ahead.
The consumer price index report hits on Wednesday morning and expectations are for a 0.3% monthly gain and 2.4% annually on the headline number, with core CPI at 0.2% monthly and 2.5% annually. Those numbers are based on data before the oil spike fully registered and a surprise to the upside would quickly revive the stagflation conversation that the market is trying to digest. That is probably keeping some folks on the sidelines for now.
Breadth is running negative with only 42% of stocks in the green and the Dow Jones industrial average lagging. Semiconductors (SMH) are the leading group, and a handful of large-cap technology names are doing most of the work holding the indexes up. The market is narrower than the index levels suggest.
Related: Was Monday's Rally Short Covering?
Staying Patient
As I have indicated quite a few times lately, I am staying patient and not doing much new buying. I want to build some positions, but the conditions do not feel right yet. A follow-through day as early as Thursday would change that calculus. Until then the watch list gets longer and the trigger finger stays quiet.
Relative Strength: The Most Important Factor in Stock Selection
One issue worth discussing today is the role of relative strength in stock selection, because it is one of the most misunderstood concepts in active investing. Is it better to buy stocks that are cheap and lagging or to buy stocks that are strong but may be expensive?
Two names I am following right now illustrate the tension perfectly.
If you have been following my work for a while, you know that Xeris (XERS) is one of my top picks. The company is a rare small-cap biotechnology name with strong and growing revenue from three products and a pipeline candidate with a total addressable market of over $1 billion. The fundamentals have never been stronger. The stock is acting poorly and is technically weak.
This is a good example of why relative strength matters so much in the short term. New buyers want to see relative strength in the price action as confirmation that the fundamentals are solid. When a stock is technically weak, it creates the presumption that something is wrong beneath the surface, even when the fundamentals argue otherwise. There must be some reason buyers are not showing up. In many cases, the weak price action itself is the reason. It keeps momentum players away and creates a self-reinforcing pattern.
Short-term traders are primarily attracted to stocks with relative strength because positive momentum drives short-term profits. They are not interested in a turnaround story that requires patience or stocks that have great fundamentals but negative price action.
Value buyers see this very differently. They view relative price weakness as an opportunity when they are confident about the fundamentals. They give their fundamental evaluation far more weight than the price action but they also have to be patient, because it can take the market a long time to embrace solid fundamentals. Just because a stock is cheap does not mean investors will rush in. They will not be interested until relative strength improves.
At the other end of the spectrum is Amprius Technologies (AMPX) , which I highlighted on Feb. 23 at around $10. The stock has made a parabolic move and is now up about 80% to $18.25, making new all-time highs. Fundamentally, it looks expensive. The company is still losing money and is not expected to reach positive earnings until 2027. But it has a powerful story as a developer of lightweight batteries for drone applications, and traders like that story. The primary reason they are buying it, however, is the relative strength. The price action itself is the argument.
The idea that "someone knows something" is working in favor of AMPX. The same thought is working against XERS, because of the negative relative strength.
This distinction matters when building a portfolio right now. If you focus exclusively on finding the cheapest stocks you are likely to accumulate names with poor relative strength that may sit for a long time before the market comes around. If you focus only on the strongest relative strength names they are likely to be expensive and more prone to hard reversals and sharp pullbacks.
I tend to carry a mix. Some positions are compelling values where I am willing to be patient. Others have the technical strength that produces shorter-term gains. Both have a place but they require very different mindsets and very different time frames.
The great thing about this market is that there is always a new opportunity. We just have to be patient and make sure we buy at the right time.
At the time of publication, DePorre was long XERS, AMPX.
