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It’s a Stock Picker’s Market (That Includes You)

Posted September 08, 2023

Zach Scheidt

By Zach Scheidt

It’s a Stock Picker’s Market (That Includes You)

Believe it or not, I’m incredibly excited about the trading opportunities in today’s market. 

Sure, many of the popular large-cap stocks have been trading lower recently. And this has weighed down the broad market indexes. 

But that doesn’t mean that all stocks are in trouble. In fact, many of the smaller stocks in these same indexes are gaining while the rest of the market lags behind. 

And if you look carefully for these pockets of strength, you can do well while other investors are struggling to stay afloat. 

I discussed this idea in more detail yesterday on my regular live Zoom call that I hold for my Income Alliance subscribers. 

You can check out a portion of this call by clicking on the video below. 

Click here to learn more

Video Transcript: 

The first thing I wanted to point out is that we're seeing weakness and even some cracks in the armor for some of the mega-cap tech stocks. 

So the stalwarts Apple, Nvidia, and Tesla. Those are three names that I've been watching carefully this week because they're all beginning to show some cracks. 

There’s a different story for why each of them is trading lower.

For Apple, it has to do with China banning iPhones in certain government buildings, which could wind up being a much bigger deal for Apple. They're worried about their sales because China's an important market for them. 

Nvidia is a big artificial intelligence company that makes high-powered processing chips. The stock has been on fire this year, and now it's starting to roll over after a very positive earnings announcement. 

One thing that you learn in this business is that when there's good news for a company and the stock doesn't trade higher, that’s a warning sign that something may be wrong.

Because if it doesn't trade higher on good news, what will it trade higher on? So that’s one of the reasons Nvidia is beginning to crack.

And then Tesla has been cutting prices for many of its existing models, which is going to cut into profits. 

But it's what they have to do to stay competitive as the rest of the auto manufacturing world catches up and starts to put out more electric vehicles. 

These are all important stocks for the broad market, and they're starting to trade lower. 

It's important to kind of understand how the market indexes are organized and how these individual stocks affect the markets. 

The S&P 500 is the most widely followed market index. And it's a market cap-weighted index, which means big companies have a much larger effect on where the market is trading. 

So if Apple drops by 2% and every other stock in the index goes up by 1%, Apple could actually hold the entire index back because of its oversized influence.

This is interesting because as an individual investor, you probably don't invest the same way, right? 

You probably put $5,000 into each of several trades, or $10,000 into each of several trades, or whatever makes the most sense for you. 

But you don't look at a stock and say, well, this company is big, so I'm going to buy more of it. Or this company is small, so I'm going to buy less of it. 

In other words, the S&P 500 doesn't exactly follow the way an individual would invest their capital. 

In many cases, these large stocks are the ones that drive the action higher or lower. And your returns may be different because you're more widely diversified. 

Hopefully, you’re not beholden to this handful of big stocks that are driving the market higher or lower. 

Now, this can work in our favor and it can also work against us. For instance, in the first half of this year, the mega-cap stocks were strong.

That helped keep the broad market moving higher, even though some of the other stocks were not performing as well as we would've liked to see. 

Now we're starting to see a little bit of a reverse of that, where the large-cap stocks are pulling back, but there's plenty of strength under the surface in many other areas of the market. 

I'm keeping a close eye on some industrial stocks on healthcare stocks. And we'll talk a little bit about the different energy stocks and other areas of the market that are showing strength. 

But just for example, Stryker, the healthcare company that we have in our Income Alliance portfolio, we were actually able to take a nice profit today.

And the stock looks like it's continuing higher, even on a day when the broad S&P 500 is down. 

We've actually got a lot of green on our screen, as you'll see in a minute when I show you my trading platform in our Income Alliance positions, even though the market is red. 

So don't pay too close attention to the market indexes without understanding that the components within an index can be higher or lower. 

One of the things that I really love about the market that we're in right now is we are moving into more of a stock picker’s market, as opposed to just an index market. 

In the past, investors were buying the market or they were getting out of the market, but they weren't making a whole lot of differentiation between different stocks within the market. 

Now we're starting to see the correlation of different stocks actually decrease. 

In other words, one stock may be trading sharply higher while another stock is trading lower because investors are focused on what the actual company is doing. 

And that’s very good for us as stock traders, because it creates opportunities on both sides of the market. 

Right now, I'm really excited about our biggest bearish position Nvidia, because it's trading lower and we're starting to see some chinks in the armor. 

Meanwhile, I'm excited about our bullish positions as well. Costco is trading higher, gold is trading higher, Google is trading higher, and Oracle is trading higher. 

In a stock picker’s market, we can make money on both sides. We can be a little bit more diversified into bullish and bearish positions, and that creates a more stable opportunity for us. 

It's a good spot for us to be in, and I'm really excited about our potential as we head into September and then the final three months of the year.

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