The great thing about market pullbacks is that they create new opportunities for active traders. But before we can focus on finding new stocks to buy, we must be sure that we are properly positioned to weather further downside action should it develop.
The first step during a downtrend is to cut losers quickly and raise cash. If you suffer losses, you are more likely to make it up with stocks other than those that created the losses. Once you have raised cash, make sure you manage it effectively. The biggest mistake people make during downtrends is to deploy precious capital too quickly.
The fun part of a downtrend is finding new ideas, and then stalking them for optimal entry points. I find it very helpful to start with a shopping list of stocks to track and trade as the market evolves. Typically, the stocks I track have a mixture of strong fundamentals and favorable charts. In most cases, the charts will have suffered setbacks and will need work, but buyers will return quickly as market players sort out those stocks being unfairly punished by a weak market.
Here are some of the names on my current watch list:
BioTelemetry (BEAT): Its cardiac monitoring device is going to be covered by insurance, and it posted a strong quarter.
Fox Factory (FOXF): This recent initial public offering opened strongly, and then faded. The company makes components for bikes and all-terrain vehicles. It has very strong earnings-per-share growth and it should be interesting into initial analyst coverage.
Sarepta Therapeutics (SRPT): This biotech has seen tremendous results for key drugs. It is looking to gain accelerated approval from the Food and Drug Administration.
LightInTheBox (LITB): This China play has been a recent momentum favorite. It is a bit pricey but good numbers should keep it on the radar of aggressive traders. It reports earnings on Monday.
Noah Holdings (NOAH): Another China play, NOAH is focused on money management. It reported great numbers but has not yet seen estimates come up strongly.
NQ Mobile (NQ): Also a China play, NQ Mobile provides mobile security. Earnings were well ahead of expectations and analysts at Topeka gave the stock a target of $33.50.
Novadaq Technologies (NVDQ): A sleeper play on new medical technology that is gaining traction.
InvenSense (INVN): It produces motion-processing components used in electronic devices such as the iPhone.
Osiris Therapeutics (OSIR): A biotech play that develops stem-cell therapies. Recent data has put this name in play.
GSV Capital (GSVC): A closed-end fund that holds private shares of Twitter. It will be the go-to name for traders as talk about of a Twitter IPO heats up.
Revolution Lighting Technologies (RVLT): A manufacturer of LED replacement bulbs. Revenue has exploded and the company is building earnings.
ACADIA Pharmaceuticals (ACAD): This biotech has had recent success with a drug for Parkinson's and has a number of other promising things in the works.
In addition to the small-caps above, I'm keeping a close watch on certain big-cap momentum names. There are always one or two that will lead the market, and the most likely candidates are Tesla (TSLA) and Facebook (FB). LinkedIn (LNKD), Netflix (NFLX) and Google (GOOG) are also good candidates, but my favorite is FB and I'll be looking to build a position.
I'm not much of a bottom-fisher, but one group I will be watching is fertilizers, including Intrepid Potash (IPI), Monsanto (MON), Potash (POT), CF Industries (CF) and Agrium (AGU). If "cartel" issues are resolved, as many analysts believe, these names should come back quickly.
Keep in mind that a watch list is a work in progress that changes constantly. I am always looking for new ideas and I quickly drop things that don't act the right way. Develop a good watch list, and you'll find yourself looking forward to market corrections.