Morning Market Thoughts

by DAN Good morning. The futures are up a bit this morning, with the Dow set to open about 50 points higher, the S&P up about 5 points, while the Nasdaq is flat as a puddle. To recap last night’s Strategy Session, there is a rotation out of tech and into some of the more relatively defensive sectors such as retail, homebuilders, consumer discretionary, financials, and transportation. Really…just about anything but tech.

The profit-taking in the semiconductor sector actually started last week. But since the trend was so pronounced and the Semiconductor Index ($SMH) was so extended, it took a few days for many traders to conclude that the pullback was likely more than just a ‘buy the dip” opportunity. Now, the SMH is down 8.5% in just 6 days. If you are still long semiconductor stocks, then you’ve either got a long time horizon and view them as investments (which is certainly a viable approach. You don’t want your entire market exposure to be sitting in your active trading account), or you’re simply wrong.

Waiting for your favorite stock to come back is a tactic used by many inexperienced traders who never last long enough to gain sufficient experience to know that the market is always right. Being stubborn might work in some aspects of your life (though I can’t really think of any right now, unless you equate stubbornness with perseverance), but it doesn’t work in trading.

Consider Nvidia ($NVDA). This is a great company with very strong business prospects. It’s also fallen 15% in 5 trading days. You may be thinking that this is a great buying opportunity. “Hey, this is the dip I’ve been waiting for!” Well, that’s not right. Who are you buying from? Zoom out on the chart and the answer will be right in front of your eyes. Since February of last year, NVDA has advanced 770%. It is owned by more than 2,000 funds. This is not a new idea. It’s not an overlooked stock. Large money managers hold stocks for a long, long time. They anticipate the types of developments in Nvidia’s business and buy early. Now, they are booking profits. And they’re selling to you.

Trust me. You don’t want to do business with large funds. Don’t buy what they sell; and don’t sell what they are buying. You want to be running in the same direction as they are — preferably at the front of the pack so that their buying pushes your stock higher.

Look at your account holdings. Can you make a case for owning every stock in your account? Do you have a time frame in mind? Is it a “trade”, or do you intend to hold the stock for a while, irrespective of any pullback? I don’t know the answer to your question; I just know that this is the question you need to ask yourself. If you’re not asking that question, then you’re not thinking — you’re hoping.

See you in the forum.

–Dan

(My best wishes go out to all of our friends up in Ventura County, who are facing a very very serious wildfire that is totally uncontained. I mean, 0%! The Santa Ana winds are an annual phenomenon in Southern California and they kicked up yesterday. California has had its share of fires this year, and I’m hoping that our brave firefighters have this one under control soon.)

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