After a sharp two-week sell-off, some positive stock market trends have emerged. Here are three that stand out - and three stocks leading the rebound.
It’s been a bit rough for the market lately, as the S&P 500 suffered a 7% drop, the Nasdaq fell more than 10% from high to low, and even worse, many of the initial leaders of this rally cracked support and fell 20% or more from their highs.
Given the prior prolonged runs in many of them (four to five months and often rallying more than 100% from their breakout levels, never mind their low points in March), my guess is that many of these stocks are going to need time before starting their next upmoves. (I do continue to think most of these leaders are “early stage” and will have another leg up, but they probably need time to catch their breath.)
However, I’ve seen a few growing positive stock market trends emerge during the past couple of weeks.
3 Positive Stock Market Trends
First is the fact that the major indexes, unlike so many of the initial growth leaders of this rally, have (so far) held key support near their 50-day lines. That’s key for my intermediate-term trend model (called the Cabot Tides), which has remained positive. (Yes, that can always change, but I never anticipate these things—if it’s positive, you have to assume it will stay positive, even if it’s close.) The fact that buyers stepped up where they were “supposed” to is a good sign.
The second positive is something we’ve seen numerous times in recent years, and it involves investor sentiment. While investors can get a bit giddy at times during advances (and I definitely saw some of that in August as everyone wanted to pile into the popular mega-cap tech stocks after huge advances), sentiment quickly backs off and gets fairly negative within a couple of weeks.
For instance, take a look at the total amount of assets in the bullish Rydex funds; it’s a niche indicator but has a history of tracking the market (up and down) pretty closely. You can see things got a bit euphoric at the end of August, with asset levels reaching multi-month highs, but have quickly sank back to their lows from June.
Another example comes from AAII, whose weekly survey has shown consistent bearishness among individual investors since the March lows. But even taking that into account, the weekly tally dipped back toward its lowest (most bearish) levels of the year last week, with nearly 25% more bears than bulls. Granted, sentiment is a secondary indicator, but it’s good to see so many investors hit eject after just a week or two of declines.
The third positive stock market trend is the most encouraging—while the initial, extended leaders still look ragged, with many unable to get off their knees, money has begun to flow into other stocks. And I’m not just talking about rotation into cyclical names (although there is some of that going on)—I’m seeing a decent number of growth stocks either come back to life after corrections or set up after resting for two or three months following their off-the-bottom moves this spring.
3 New Leading Growth Stocks
For coming back to life, I’m intrigued by biotech stocks, which got a boost this week after some M&A activity in the sector. One of the big news items was Merck inking two collaborations with Seattle Genetics (SGEN), which we’ve viewed as an emerging blue chip in the oncology space. (Merck also took a $1 billion positive in SGEN, a solid vote of confidence.) The stock was a leader earlier this year but stalled out with the biotech group, but it flashed a major volume clue on the Merck news and is approaching its old high.
Another example of a name that’s been out of favor for even longer is Five Below (FIVE), the dollar store for teens and pre-teens that sported rapid, reliable growth for years before (a) the trade war and then, just as that was being ironed out, (b) the shut-in associated with the virus. But after a big comeback, shares tightened up for 11 weeks and then broke out after the recent quarterly report showed that the growth story is back on track.
And then there are names that have a great longer-term setup and have been resting for two or three months, building strength while the initial leaders were ripping higher—now they’re in position to lead the market’s next advance.
A good example is Beyond Meat (BYND), the leader in the alternative meat area that, after a big post-IPO droop through March, showed fantastic accumulation through mid-June. There were some virus-related hiccups (foodservice sales fell in Q2), but in-store and direct sales were red hot, and the stock has spent the past 13 weeks building a nice cup-shaped base, with volume drying up on the way down, some tightness on the bottom and some volume accumulation as the stock perks up—all good signs.
Of course, if the market has another big leg down like it just had, then all bets are off—such action would likely bring everything back down. But it’s vital to have a watch list of some of these new potential leaders should the recent weakness be more of a shakeout than a real change in character.