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I Believe 'Ugly' Would Be the Proper Term for the Selloff: Market Recon

"The pessimist sees difficulty in every opportunity. The optimist sees the opportunity in every difficulty." -- Winston Churchill

Whack-A-Mole Equity market breakdown? Not exactly. Something different? Sure, but so were Members-Only jackets. Thursday's equity markets action felt like a massive selloff, at least to those of us who sweat these things out trying to make a dollar. It felt severe. At the end of the day, there clearly were bright spots that buoyed the broader marketplace. Odd day, for sure. Performance, and opportunity? Always opportunity. Let's explore.

We first tackled the thought that the transports were starting to diverge from the Industrials in Market Recon last week. Yesterday did nothing to dissuade that thought. The Dow Jones Transportation Average has now surrendered a rough 3.5% over the last month versus a 1.5% increase in the Dow Jones Industrial Average. Yesterday's action saw the Transports lead other segments of the equity markets lower. Ugly, I believe, would be the proper term. After the airlines and railroads had already been visited by the "Stick", they were then joined by some high-flying tech and biotech names in what became something of a rout. In my opinion, some risk managers may have forced their traders to take profits in stocks, where they had them, that also trade at "tough to justify" valuations. You could see more of that this morning.

So, what did well? Energy and old economy-type value names. What differentiated traders who were injured yesterday from those able to whether a sudden storm? Diversification. Plain and simple. When rotations come out of nowhere as this one seemingly did yesterday, without a technical, nor a fundamental catalyst, that's your best defense. Now, that something different is under way, what do we do about it? Do we change what we're doing? I would say yes, and no. It's called finesse. Let me explain.

Transports

I have been long the airlines for quite some time. If you read me, you know that. Too long. That worm had clearly started to turn. I am not flat the space, but I have consolidated into what I consider to be the highest quality name in the space, Action Alerts PLUS charity portfolio holding Southwest (LUV) . While doing so, I have reduced exposure here by 40%. We saw a nice discount taken in LUV in response to earnings yesterday, and that discount was taken advantage of by the trading public very quickly. Just tread carefully. If LUV retests yesterday's lows, the name could then retest the lows of March. I am OK with that. I do not know if you are.

I have also been looking to buy into the railroad space. Honestly, they are not yet cheap enough. The most intriguing of these names, I feel, for the retail investor would still be CSX Corp. (CSX) , despite the sloppy second quarter earnings. I made some nice dough in CSX this year, but took my profits way too early. That stock closed at the $50 level last night, after peaking above $55 earlier...


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