One of the most fascinating things about corrective action like we are seeing now is how indiscriminate the selling can be. The fundamentals or individual merits of a stock become meaningless. There are big funds and institutional investors that have to unwind trades for a variety of reasons and it doesn't much matter that the stock is already badly beaten down and is a decent value.
Because this selling can go much further than is reasonable we have to use stops and money management to protect ourselves. Fundamentals do not offer any protection in the shorter term. Nothing destroys traders more often than averaging down into a stock that they believe is unfairly sold.
The good news is that eventually this action always does lead to some great opportunities. Those opportunities will develop over the course of weeks or months, which is why you don't have to rush to buy into the teeth of a decline.
When the turn comes and stocks start to trend higher again there will be plenty of time to build positions. You won't miss out if you aren't fully invested at the exact moment the market bottoms. Your goal should be to have an extremely high level of cash when the market starts to act better. One of the big benefits of buying after there is some upside is that it is much easier to manage trades. The lows will be obvious support and there will be opportunities to average up as a trade develops.
The best thing you can do right now is work on a shopping list. A couple of bigger cap names that are looking interesting are Disney (DIS) and Twitter (TWTR) . Relative strength in a poor market is a good sign that a stock may continue to lead when the action improves.
Macy's (M) picked a bad time to announce its earnings. It was a solid report with an eps beat and increased guidance but in this environment the primary issue facing investors are exit points before something can go lower. Macy's had bounced well and the setup for a 'sell the news' reaction was just too good. Even solid numbers can't overcome the price action that is dragging everything down right now.
Macy's is likely to be a good play when this market bottoms and retail shows some signs of strength but right now there is no compelling reason to put capital at risk in this sector that is still trying to find support.
(Disney is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells DIS? Learn more now.)
