The much-anticipated market pullback seems to have begun this week—the S&P 500 and Nasdaq look set to snap their streak of weekly gains, with each index down about 1.5% since a week ago as of this morning.
While there’s no problem with those two indexes, the broader indexes (small- and mid-caps, etc.) have fared worse—down 2.5% or so—and each is back toward their April/May highs. Digging deeper, the sector on the margin remains financials, in particular, regional banks; the SPDR Fund for that sector (KRE) was down nearly 7% on the week coming into today. If you’re looking for something to keep an eye on, our thought is the financials (and the impact they have on the broader market) are it.
Near term, we think the odds favor the market dishing out some more discomfort, along with some bad news. We saw plenty of Fed jawboning this week (two more rate hikes seems to be the consensus view, at least for now), and this morning came some very bad European economic data, raising fears that the long-awaited recession may be coming. (I’d also point out that Cabot Options Trader’s Jacob Mintz has seen some good-sized call selling this week above the market—often a sign that big players aren’t anticipating a ton of near-term upside.)
Thus, when it comes to buying, we’d remain selective and aim for dips, especially with names that are extended.
Now, with all of that said, the overall evidence remains in good shape: The market’s intermediate-term trend is still up, and most important, leading stocks continue to act well, with very little abnormal action and, frankly, a lot that continue to look peppy. Again, that doesn’t mean you should be chasing things higher or that things won’t eventually retreat, but it’s certainly a positive indicator.
All told we do expect some more turbulence near term, but we’re leaving our Market Monitor at a level 7. If something really changes (say, the intermediate-term trend gets messy again because of the broad market), then we’ll change, but so far the action looks normal, especially when it comes to the leaders.
POTENTIAL BUYS
Lam Research (LRCX) built a nice base from February through April, broke out nicely and had a solid, big-volume run and has now chopped straight sideways as the 25-day line has caught up. We think it’s a good risk-reward trade—you could nibble here with a tight stop near 580.
ServiceNow (NOW) isn’t the fastest horse, but it’s chopped up and down so far this month, tagging its 25-day line yesterday. Like most things, it could pull in further, but grabbing some shares here with a stop near the 500 level (also near the 50-day line) seems like a good bet.
SUGGESTED SELLS
Partial Sells
If you bought some Palo Alto Networks (PANW) three weeks ago, you could consider shaving off a few shares as it’s extended and near round-number resistance (250). Overall, the late-May breakout looks great, but taking a few chips off the table makes sense.
Full Sells
Boeing (BA) – failed breakout and then follow-on selling after its air show.
DoorDash (DASH) – looks OK but not powerful. Taking a small profit.
Exact Science (EXAS) – if you want to hold, you can, but this week’s churning after a good run has us taking a decent seven-week profit.
Urban Outfitters (URBN) – OK but unable to build on its breakout.
SUGGESTED STOPS
Advanced Micro Devices (AMD) near 105
Builders FirstSource (BLDR) near 110
DraftKings (DKNG) near 22.5
Duolingo (DUOL) near 139
Eagle Materials (EXP) near 161
GFL Environmental (GFL) near 36
GXO Logistics (GXO) near 56.5
HubSpot (HUBS) near 469
Intra-Cellular Therapies (ITCI) near 61.5
Lam Research (LRCX) near 580
NexTracker (NXT) near 38
Penumbra (PEN) near 306
Rambus (RMBS) near 57
Shockwave Medical (SWAV) near 275
Shopify (SHOP) near 57.5
Spotify (SPOT) near 143
Take-Two Interactive (TTWO) near 133
