Weekly Update: Rare Strength in an Ugly Market
Good evening, and welcome to this week’s edition of Stealth Trades!
In one of the most volatile trading sessions of the year, stocks went from “way up” to “way down” in just a couple hours Thursday.
Nvidia reported a big earnings beat the Wednesday after the close. It, along with just about every other tech stock, opened higher the next morning.
But an hour into the trading day the selling started. And it didn’t stop until the closing bell rang.
It was a bloodbath from start to finish.
Days like this are exceptionally rare…
When the market opens up by more than 1%, it almost never finishes the day in the red. It has only done so 7 times since 2015.
And the worst two occasions both came this year.
The first was April 8th when stocks melted down on tariff-related news. The other was yesterday.
Even more surprising is that this came on no apparent news…
Unemployment ticked up every so slightly (4.4% vs 4.3% est).
The Labor Department announced they would halt the October jobs report. This wasn’t great news since it lowers the odds of a December rate cut, but nothing catastrophic.
The biggest piece of news on the day was actually positive– Nvidia’s crushing 3rd quarter sales and revenue numbers. So why the big selloff?
I’ll be honest… I don’t know.
There is no obvious reason. In all likelihood, this was systematic liquidation by a large hedge fund. Maybe somebody got spooked and decided he wanted the firm’s portfolio in cash. Immediately.
Perhaps Norway or the Saudis reduced exposure in their trillion-dollar sovereign wealth funds.
Anything is possible.
But this is one of those events we just cannot predict. At the end of the day, the stock market is an auction. It is buyers and sellers trying to agree on price.
At any time, sellers can overwhelm buyers. Supply can outstrip demand. No matter the reason and whether they’re right or wrong, when a big player wants out, there is going to be collateral damage.
I’m reminded of a scene in the 2011 movie “Margin Call” where the CEO of a major investment bank decides to liquidate their entire portfolio. If you haven’t seen it, it’s worth a watch.
This is a dramatic example, but the same thing could have transpired at a hedge fund or major endowment fund Wednesday evening.
The indexes recouped some of Thursday’s losses today. I am writing this 2 hours before the close with the S&P 500 up 1.44% on the day.
There is a silver lining to events like this, however. It stress tests the market… shows you where the weakness is… and also the strength.
A clear standout on Thursday was the biotech sector. Below is a daily chart of XBI – the biotech ETF.
Do you see the selloff? I don’t.
The biotech sector looks like business as usual. Its uptrend is completely unphased. So, at least for right now, this is an area I will be looking to find new setups.
One of our analysts, Tyler, has been focused on this space for a few months. And he sent over a couple of his favorites.
One is Cogent Biosciences (COGT).
Peak Phase 3 drug trials for its new drug, Bezuclastinib, showed tremendous success. I won’t pretend to understand the science, but the chart looks beautiful.
Following a 119% overnight gain, shares have held their ground. In fact, they are drifting higher. This is likely the start of a much longer run higher.
Arcellx (ACLX) also looks great.
This mid-cap biotechnology company has nearly doubled off its April lows.
It is now setting up what looks like a potential breakout move higher.
Look, Thursday was tough. I get it. I took a lick just like everybody else. But this is, unfortunately, just part of the game.
We pick ourselves up, wipe off the blood, and climb back in the ring. Weeks like this are what mold seasoned traders.
Best wishes for your trading,
