All ships rise with the tide. That adage is often used with the markets. Warren Buffett added a bit to it that is most relevant today. “Only when the tide goes out do you see who is swimming naked.”

There are many stocks that correlated to broader market trends. It can become a chicken and an egg question, but the bottom line is that their tendency to follow the market is greater, even when circumstances may suggest otherwise.

One of my favorite stocks is DexCom (DXCM). I have written about it many times before (check out past articles here). As the company has grown, it has gotten more and more correlated to the broader market. Recently has been a great example of what that looks like.

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After being on a tear for most of last year, DXCM has been right in the cross hairs of the beating the market has been taking since the start of the year. Recently it announced FDA approval for a hospital application for its technology that would mean a pretty significant expansion of its market. That news had the potential to gap this stock way back up. in reality, all it saw was a curl to the upside that still hasn’t gone over the most recent high.

When a stock hits a decent amount of volume and liquidity and has strong momentum upward it pops on the radar of the institutional crowd. The trades they place can often cause that tighter correlation with the broader market. Since the current view of the broader market is quite puckered, this recent news has been quite muted.

There is a possibility that the impact could just be delayed as the market figures out what the future will look like but there is also a strong chance that the broader tide will keep pushing this stock down. At some point it may find a bottom and be a great discounted grab, but for the short term would guess it is going to hit resistance at the 50 day moving average and drop.

This sets up an opportunity to buy a put option. With the longer outlook on this more uncertain, grabbing a March put option with a 400 strike at around $8.65 could turn out to be a good move. If we see any more movement to the downside in the next week, that could really spike.

We’ll keep an eye on this and also dig into other stocks that are being pushed down by the broader trend.

Keep learning and trade wisely,

John Boyer


Market Wealth Daily