Here’s How You Know You’ve Found a Great Trade…
“Don’t fight the tape” is an old Wall Street saw you might have seen before.
What does it mean?
It simply tells you to go with the trend when investing and trading. If you fight the tape, you make boneheaded moves like investing in stocks that are in a downtrend. Most of the time, buying stocks that are going down ain’t a good idea.
But many traders ignore this simple truth. They think they’re being contrarian when they’re actually being stupid. So they try to swim against a strong current and get carried away…
The financial news machine has engaged in more than its fair share of tape-fighting since the market bottomed out last month. Pundits are screaming about a bigger drop on my television almost every single day. And you can’t go an hour without stumbling across a new Wall Street report predicting another deep, painful drop in the stock market.
But one glance under the hood of this market tells us everything we need to know. Stocks aren’t weakening right now. In fact, we’re seeing some of the market’s most speculative names beginning to heat up once again. That’s not bearish!
Small-caps have enjoyed a massive post-tariff bounce this week. The small-cap Russell 2000 just posted a four-day winning streak, gaining almost 4.5% since Friday’s open. For comparison, the S&P 500 gained just about 2% over the same timeframe.
“The Russell 2000 has outperformed the S&P 500 by 3.4% over the past 5 trading sessions,” LPL Research’s Ryan Detrick notes. “You have to go back to right after the US election the last time we saw something like that.”
Small-caps aren’t the only speculative darlings catching a bid this week. Biotechs are also getting in on the bullish action.
We’ve tracked our beautiful biotech bounce since the market first started bottoming out in February. Before the meltdown, we noted that the biotech sector was outperforming the averages to kick off 2018 trading. Merger madness had taken hold, pushing shares of many promising companies in the sector to new highs.
More importantly, the SPDR S&P Biotech ETF (NYSE:XBI) has proven resilient during the volatility spike and selloff.
In fact, XBI never closed significantly below its 50-day moving average as investors dumped stocks. That turned out to be a huge tell…
Less than two weeks ago, we shoed you how XBI had jumped more than 9% on the year, compared to a year-to-date gain of just 5% in the Nasdaq Composite. As of yesterday’s close, the biotechs are still clinging to their lead over the tech index. XBI is up almost 12% year-to-date, compared to a gain of 7% for the Nasdaq Composite.
As I mentioned in February, I’ve been stalking some new trade ideas in the biotech sector for some time. Now that earnings season is wrapping up, we should see some of the strongest biotechs continue to build on their market-beating gains…