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Big Bounce Makes Entry Points Difficult

James ‘Rev Shark’ Deporre says pullbacks are coming for those holding cash.

Big market bounces offer opportunity and risk to buyers, and this week’s trading scene is no different.

The fact that stocks are up opens the door to more aggressive buying – but where does an investor start?

James “Rev Shark” Deporre has a notion or two on current market conditions and what investors can do to get through difficult entry points.

“The S&P 500 is up five days in a row, and the highs that were hit in early September are within a stone's throw,” Rev Shark wrote recently on Real Money. “Stocks are extended after the strong run, and entry points are difficult, but market players that took defensive action during September most likely still have the cash to put to work.”

One big problem: V-Shaped bounces like we've seen the last five days tend to make entry points for new buys difficult.

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“That’s even more so when there is rotational action taking place,” Deporre noted. “It’s been the high beta, growth names that have been attracting most of the new buying because they provide some amount of leverage -- they move bigger than the overall market.”

Another big issue right now -- many of the smaller cap names have not participated to the same extent as the bigger caps. “These stocks tend to lag because investors are slow in looking for values,” Deporre added. “They buy hot growth first and then will start to look for the names that have lagged but have good fundamentals.”

If you’ve been playing on the defensive side of the ball during the market correction, you may have been struggling to keep pace with the bounce. “High cash balances looked great a week ago but deploying that capital becomes very challenging when stocks suddenly go vertical,” Rev Shark noted.

The solution to this issue is like the solution to most trading issues -- keep on slogging.

“I'm not too concerned about high cash balances at this point, as I anticipate that charts will continue to develop well from here,” Deporre said. “The big bounce over the past week is a major step in chart development, but now we have to watch for pullbacks and consolidation.”

Get more trading strategies and investing insights from the contributors on Real Money.