I have been writing quite a bit recently about the strong action in certain sectors of the market such as biotechnology, big cap technology, recent China IPOs, etc. These stocks have offered some great trading while the DJIA has been downtrending for days.
However, if you live by the sword, you die by the sword. Stocks that go up on strong momentum tend to have some nasty reversals. It is very easy to give back gains quickly if you aren't careful.
To guard against this problem, I tend to sell incrementally into strength. That can be frustrating when stocks go parabolic and you find yourself with only a small position left but it doesn't feel so bad on a day like this when the recent momentum names are being hit hard.
Some of the names I've been discussing recently such as Turtle Beach (HEAR) , Sogou (SOGO) , Bilbili (BILI) , HUYA (HUYA) , iQIYI (IQ) and LiveXLive (LIVX) are down sharply today. In all cases I have reduced my holdings or been stopped out. However, these are stocks that I will continue to watch very carefully. Hot momentum stocks typically have several lives. They will regroup and traders tend to pile back in as they hope for the magic to return.
Rebuying momentum stocks that have dipped is a very tricky task. It is not easy to find an entry point and you have to allow for some volatility and still use prudent stop levels.
Stock picking has been working very well for weeks now as illustrated by the outperformance in small caps. We'll see how things develop but today may simply be a healthy bout of profit taking after a good run. Many traders have been overexcited by the strong action and that is usually the que for the Market Beast to remind us not to take her for granted.