The market got dealt some bad pieces of news this week—and by “bad” we mean higher-than-expected inflation and better-than-expected retail sales and jobless claims, which raise the prospects of more aggressive Fed tightening. That’s led to some selling yesterday and again this morning.
Still, after getting a bit hot and heavy two weeks ago, the key was going to be how the market pulled back. Last year, when things perked up, the sellers quickly ravaged the indexes and stocks, especially after the Fed did some saber-rattling. But while the past two days aren’t pleasant, the recent two-week rest period looks normal so far—the intermediate-term trend is clearly up, the long-term trend is still up, the broad market is still healthy, defensive stocks aren’t outperforming and most individual stocks are pulling back constructively.
Of course, we lived through last year like you did, and saw the damage that can happen when the Fed gets aggressive—so we’re certainly not going to assume all will end well here, and we are seeing some secondary things (junk bonds are much weaker than the major indexes; Treasury yields held support and are headed higher) that aren’t ideal.
That said, we’re also not going to assume this time around will simply copy last year—especially as the evidence is much better out there.
Long story short, we remain optimistic, but it’s important to also be flexible: If the rally runs into real headwinds, we’ll likely pare back, but should the buyers return in a big way, we actually think there could be a lot of great entry opportunities among new leaders that have taken the past two weeks in stride.
In the meantime, we’re leaving our Market Monitor at a level 7, but we’re also fine-tuning many stops and going easy on the buy side here as we wait to see the market show its hand.
BUY IDEAS
Southern Copper (SCCO) is the stronger of the two big copper names (FCX is the other) and has been cool as a cucumber since its straight-up move in early January. The 76-77 area is near-term resistance, so nabbing some shares in the 74 area (give or take) with a stop under the 50-day line (now near 68) looks like a good risk/reward.
Steel Dynamics (STLD) is another metals play that’s acting just fine—dips into the low 120s would be tempting, with a stop in the 110 area (near the 50-day line).
Given their three-month runs (November-January), homebuilders might need more time to rest and shake free some weak hands. But so far the action has been very orderly—Toll Brothers (TOL) has dipped to the 25-day line,
SUGGESTED SELLS
Partial Sells
None this week
Full Sells
Abercrombie & Fitch (ANF) – looks fine, but has had a persistent run and isn’t showing great power. We’ll take a small profit.
BioMarin Pharmaceuticals (BMRN) – tripped stop
First Solar (FSLR) – tripped stop
Toast (TOST) – had a great-looking chart, but a sour Q4 report crushed the name
SUGGESTED STOPS
Academy Sports (ASO) near 50
American Airlines (AAL) near 15.4
ASML Inc. (ASML) near 605
Boeing (BA) near 197
Boot Barn (BOOT) near 74
Discover Financial (DFS) near 107
Exact Sciences (EXAS) near 57.5
Five Below (FIVE) near 181
Freeport-McMoRan (FCX) near 40.5
Impinj (PI) near 120
Noble Corp. (NE) near 39
On Holding (ONON) near 20.5
Reliance Steel (RS) near 219
Valero (VLO) near 127.5
Zillow (Z) near 43
