Some of the most successful and experienced traders I know recently said that the current market environment was one of the most difficult they have ever faced. Casual market observers may be puzzled by this comment, as the correction in the indexes is relatively mild compared with previous bear markets. Since the S&P 500 is still at 20%, most of the business media doesn’t consider the current action to be a bearish market.
This disconnect between the different market areas is the root of so much confusion for experienced traders. Stocks with higher volatility are preferred by aggressive traders because they produce the largest moves. However, these stocks have been heavily pounded in recent times.
High-priced and high-beta stocks have not received any support, regardless of fundamentals. Stocks with small-caps and growth shares, biotechnology, SPAC related names, and many other stocks are deep within bear markets. They are trading near their lowest levels, but they cannot bounce as the indexes continue to be under pressure and in an early phase of correction. Although there are no signs of a bottom yet, the pullbacks have reached extreme levels.
This market is extremely difficult right now, but it has the potential to offer some extraordinary opportunities. I have never been more positive about the long-term fundamentals for a number stocks I like. For example, in the biotechnology sector, I believe that Aurinia Pharmaceuticals (AUPH) and Xeris Biopharma Holdings (XERS) are going to be stellar performers once the pressure on the sector lifts and the market starts to favor individual stock-picking again.
Many stocks are under severe pressure due to illiquidity and sector flows. The Fed’s shift in position is causing massive capital flows that have little to do with individual stocks and is causing enormous collateral damage.
Our job is to navigate this market and be ready to move quickly and aggressively if market conditions change. It may seem a bit hopeless, but there is one thing certain about the market: cycles. This cycle will eventually shift.
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