Did Growth Stocks Just Bottom? (Potentially for Now)
Growth stocks are trying to find their footing.
Did we just see growth stocks bottom on Tuesday May 11th? It’s possible.
Many of these stocks gapped down notably on the day before enjoying a solid reversal and closing higher on the day.
Last Friday May 7th, we had a big jump in Roku on better-than-expected earnings. That was a nice change of pace, as the market had been selling growth stocks regardless of whether the earnings were good or not.
Now that’s characteristic of a bear market.
On that day, we had many names gap higher at the open. While some reprieve did feel nice, I pointed out that I didn’t like that price action because stocks typically do not bottom on a gap-up.
It’s always possible, but it’s not common.
Instead, we saw a lot of those early gains erode by the close. At this point, the selling over the last few weeks and months felt somewhat orderly, despite being painful for longs.
Then many growth stocks closed near the session lows on Monday. It was feeling slippery. However, Tuesday felt sloppy. There was a lot of senseless selling at the open, but then the group went green and closed near the highs of the day.
Now What?
Calling a bottom isn’t easy and it makes you feel like you’re putting your neck out there. I recently made a YouTube video explaining when I start to accumulate these growth stocks on big declines.
Maybe it’s helpful to you. Maybe not. Either way, it now exists on the Internet for all to see (and likely mock).
What we have now is a pivot low. In plain english, we now have a low to trade against.
When growth stocks reclaimed Monday’s low, it triggered a reversal trade. Once we reclaimed Monday’s low, Tuesday’s low became our stop-loss while looking for a push higher.
It’s a low-risk trade that allows us to probe for a bottom. How traders manage that trade from here is up to them.
In the video above, I’m discussing ways to accumulate for a longer-term hold. In a reversal trade, we might be long for a few hours and just leave some runners on overnight, due to there still being elevated risk. Others may hold against that low from Tuesday and look to own these stocks for a longer run.
It’s up to the trader — really.
What Kind of Bottom Could This Be?
The last two bottoms we’ve had in the market and in growth stocks have been V-shaped bottoms. Those came in Q4 2018 and Q1 2020.
It’s possible we have that again. But given the explosive (and in some cases, parabolic) rally we had from the Q1 2020 lows, I don’t necessarily expect that again.
From here, it would be healthiest to see a pop off the lows, then 3-6 months of consolidation and perhaps some mild uptrends in between. In short, it would healthiest to see some larger bases form in these names.
Although, just because I think that’s the healthiest outcome doesn’t mean that’s we’ll get.
It can go a lot of ways from here, but this is the Bottom Line:
For most growth stocks, watch Tuesday’s low. It wouldn’t be abnormal for this low to be tested, but I really don’t want to see these stocks close below this low.
A test of the low might be a short-term stop run; it might mean more sustained downside. I am optimistic that we’re closer to a bottom but that doesn’t mean I’m borrowing against the house to wager on that outcome. Let’s take what the market gives us and try to navigate this group as best as we can.
We saw some weakness in the Dow on Tuesday (the 11th) and strength in growth. let’s see if that’s a one-day phenomenon or something more. Cheers!
Disclaimer: Charts and analysis are for discussion and education purposes only. I am not a financial advisor, do not give financial advice and am not recommending the buying or selling of any security.