The big news of the week involved the wild, hectic action in many highly shorted stocks, which served to crush some hedge funds, which in turn likely caused some forced selling of their liquid winners—damaging many leading stocks. Interestingly, from a major index point of view, the week looks normal, with 1.5% to 2.5%-type losses as of this morning.
But, of course, under the surface, the action was crazy, with many high-flying stocks falling huge from Monday morning through Wednesday afternoon, only to see a solid rebound yesterday (and, so far, some resilient action this morning). Obviously, we have some thoughts.
First off, a reminder: When volatility picks up, so do the number of predictions and declarations by pundits. The GameStop situation has become mainstream and is even becoming a political football. If you want to chit-chat about it over the dinner table, great, but when it comes to the market, just stay laser focused on the evidence.
And what does that evidence say? Mostly that, after big runs over the past few months, the sellers are making a stand—yes, you can say it’s only because of the hedge fund issue, but it is what it is. From our vantage point, some of the selling looked abnormal, especially in some sectors (industrials and transports gapping below their 50-day lines), though to be fair, we have yet to see a rash of breakdowns through key support among leading stocks.
To us, the selling (along with the extended runs and jubilant sentiment) demands some action … but it doesn’t tell us to necessarily run for cover, either. If you’ve been flooring the accelerator, it makes sense to be more aggressive on the sell side, as you’re likely holding some losers and laggards. (Indeed, many of our trailing stops were tripped this week which forced us into a less bullish stance automatically.)
If you’ve been more discerning (as we advised), you shouldn’t sell wholesale, but we think paring back either on your weakest stocks (cutting losses, etc.) or your biggest positions (partial profits) makes sense, while holding some more cash. (For reference, Cabot Growth Investor’s Model Portfolio is now up to 27% in cash—more cautious, but not outright defensive.)
Clearly, if there’s another big selling wave from here, it would argue for a more defensive stance, though if things can stabilize, this could prove to be another shakeout (or the start of a “normal” consolidation for two or three weeks).
In sum, we’re likely to cut the Market Monitor by a notch or two come Monday, though we’re remaining flexible, willing to adjust our view based on what happens following this sudden selling wave.
SUGGESTED BUYS
AGCO Corp. (AGCO) has been in a smooth uptrend but did get yanked down to its 50-day line during the drop this week. However, impressively, the stock soared yesterday on much heavier volume, a great buy-the-dip signal. We’re OK taking a swing at it around here (small position) with a stop around 100.
Guardant Health (GH) is another name that fell sharply, but only to its 25-day line (a sign of strength), and bounced nicely yesterday on heavy volume. Short-term shenanigans are likely, but if you don’t own any, we’re OK nibbling here. If you bought and have a loss, we wouldn’t average down, but we’d hold with a stop near 138.
LPL Financial (LPLA) slid about 15 points from its highs of late, but on its first test of its 50-day line since breaking out, it bounced nicely yesterday. If you’re game, you could nibble here with a stop under this week’s low (103 or so) and look to buy more if the stock and market stabilize going forward.
SUGGESTED SELLS
We have a bunch of outright sells this week—most from tripping stops, though there are a couple that look worse for wear that we decided to prune:
Adient (ADNT)
Arvinas (ARVN)
Bill.com (BILL)
BridgeBio (BBIO)
Elastic (ESTC)
Freeport McMoRan (FCX)
Kodiak Sciences (KOD)
Lam Research (LRCX)
Qorvo (QRVO)
Sunrun (RUN)
Timken (TKR)
U.S. Steel (X)
And we also added many stops to the list in case the selling pressures continue.
SUGGESTED STOPS
10x Genomics (TXG) near 159
Albermarle (ALB) near 155
Align Technology (ALGN) near 505
Applied Materials (AMAT) near 93
Canopy Growth (CGC) near 31
Cimarex Energy (XEC) near 40
Cloudflare (NET) near 72
Enterprise Product Partners (EPD) near 19.5
Floor & Décor (FND) near 89
General Motors (GM) near 46.5
GrowGeneration (GRWG) near 40
Guardant Health (GH) near 138
Inari Medical (NARI) near 90
Marvell Tech (MRVL) near 48
Michael’s Stores (MIK) near 13.9
MongoDB (MDB) near 335
Palo Alto Networks (PANW) near 333
PayPal (PYPL) near 226
Peloton (PTON) near 137
Pinduoduo (PDD) near 154
Qualcomm (QCOM) near 149
Quanta Services (PWR) near 70
Redfin (RDFN) near 66.5
Snap (SNAP) near 48
Sonos (SONO) near 24
Spotify (SPOT) near 312
Tapestry (TPR) near 30.5
Vale (VALE) near 15.8
Zillow (Z) near 125.5