We're seeing some pockets of corrective action Wednesday, and this action is mostly in smaller stocks that had been the big winners.
Some of this selling is just routine profit-taking -- as stocks have become extended -- but the moves have been so sizable in many cases that there isn't much support. Also, the corrections are coming despite market breadth that is still fairly good, with 3,200 advancers to 4,100 decliners.
A good example on my screen is Personalis (PSNL) , which moved from around $22 to $31 in a couple of days and is down over $2 today. There isn't any fundamental reason for the reversal. The stock simply made a big move and that has triggered some profit-taking. There isn't any obvious support down to the $24 area, and that is likely causing some additional selling.
I see several drops like this, but the good news is that this is not highly correlated selling. If those drops were occurring on a wider scale and breadth was much more negative, then I'd be hitting the exits and looking for some deeper selling.
Deeper selling could still develop, but at this point, I'm not going to be too aggressive at cutting names. The key steps to deal with a market that is threatening to correct are as follows:
- Reduce position size. The most important thing you can do is make sure that you keep your emotions under control and you do that by not having large positions. If there is a position that is causing you anxiety, then cut some with the view that you can always buy it back.
- Identify the stocks you would like to build on a pullback. PSNL is one on my list. Others are Big Five Sporting Goods (BGFV) , Xeris Pharmaceuticals (XERS) , and Ocular (OCUL) .
- Start tracking the stock and looking for reentry points. Rather than focus on support levels, it is often better to look at market action. When the overall market improves, those stocks will be bought, regardless if they are at support or not.
- Set stops and don't hesitate to dump a trade that isn't working. There will be another one.