You need to find these kinds of stocks for this kind of market.
How can traders react to an “extreme inconsistency” between indexes and individual stocks?
The answer, says TheStreet’s James “Rev Shark” Deporre, is to find good counter moves with hard-hit stocks. Unfortunately, doing so correctly isn’t easy.
“During the second half of 2021, the indexes and a few big-cap names kept trending higher and hit a series of new highs,” Deporre wrote recently on Real Money. “At the same time, growth stocks, small-caps, biotechnology, and a variety of secondary stocks were stuck in an ugly bear market.”
In January, the extreme disparity began to resolve itself to some degree. The indexes pulled back from highs, some key big-caps, like Netflix (NFLX) – Get Netflix, Inc. Report and Meta (FB) – Get Meta Platforms Inc. Class A Report, fell sharply, and the Nasdaq had some clear corrective action.
Yet growth stocks, small-caps, and secondary names have continued to struggle, even as the market has seen some minor signs of relative strength.
“Twice in the last couple of weeks, there has been extremely strong breadth in the growth stocks and small- caps,” Rev Shark said. “Every single stock I held was positive, although breadth was not that fantastic, and the indexes were mixed.”
The dilemma now is that although there are a few very minor signs of bottoming in places, the charts of the major indexes look very poor.
“There is little support, and the path of least resistance is down,” Deporre noted. “As many market players have noted, it’s hard for secondary stocks to buck the trend of the indexes, but last Friday, some of them did, and there are a few more signs of it.”
“Nonetheless, trying to find good counter-trend moves in the hardest-hit stocks is tough,” he added. “We have to continue to watch the price action and see how the sector rotation develops.”
