For weeks this summer I wrote about how the record-setting trading range was going to eventually resolve itself and produce a trading range. The conventional wisdom is that trading ranges normally break out in the direction of the prior trend, but that was not the case this time. We have a clear technical breakdown and the trend has been gaining some momentum.
What is most notable about the action is that it has been so lopsided to the downside. We are seeing the streak of losses hit levels not seen in years and many individual stocks are in freefall. In this sort of environment all those arguments about valuation that were so important in deciding what to buy are now rendered irrelevant.
It is important not to over complicate what is occurring in this market. It is a good old-fashioned downtrend. We can argue about what is causing it and how long it might last, but there is no question that the trend is to the downside and there isn't much support. Many things are now oversold enough for a bounce and some groups, such as biotechnology, have been devastated -- but there isn't any reason to think there is going to be an abrupt reversal.
My game plane is to protect cash and develop watch lists of stocks that I think will bounce the best when the market improves. I don't care about buying the low, I want to buy when stocks have the best chance of sustained movement to the upside.
A few weeks ago I discussed Hudson Technologies (HDSN) as a play that could benefit from a Hillary victory in the election. It is an environment play but more importantly it reported good numbers and is one of the few bright spots in the market today. Revenues were up 61% over last year and EPS is forecast to grow 72% to $0.50 in 2017. With a trailing PE of just 17 that appears to be a pretty good value. I'll be looking to add to my position.
There are a few things like that out there, but they are limited and it is particularly important to be highly selective right now.