The iffy up-down-up-down action in leading growth names starting in late January led to some key breakdowns last week, and this week, growth stocks have been routed—the Nasdaq is down nearly 4%, but most leading names are off much more than that, with many coming completely unraveled.
Moreover, the leaders cracking has begun to affect the rest of the market as well—the broad market is still in much better shape than the growth arena, but many other indexes are joining the Nasdaq below their respective 50-day lines. For the moment, the market’s overall intermediate-term trend is on the fence, depending on how today goes.
Here are our main thoughts:
First and foremost, the intermediate-term uptrend in growth stocks has decisively cracked. Could this be another shakeout? We’re open to anything, but after such big upmoves that brought jubilant sentiment, the recent breakdowns will likely need time to heal.
Second, short-term, there is a good chance we’ll see a bounce, though it could start from lower levels. However, if you’ve been “caught” with some losers (happens to everyone occasionally), remember that the goal is to make sure a bad situation doesn’t get much worse—whether that means tight stops or selling some/holding some for a bounce, that’s up to you.
Third, for the cyclical areas (financials, oils, etc.), most still look good and we consider them earlier-stage in general—they just got going from multi-year rest periods back in November. Near-term, though, many are extended and beginning to wobble—aiming to buy is OK, but pick your spots.
Fourth, and maybe most important, all the evidence suggests this is very much still a bull market. Corrections are never fun, but the main trend for the major indexes and most of the leading stocks is still up, and even among growth stocks, we still see plenty of leaders that are likely early-ish in their overall run. (Generally speaking, major upmoves don’t die after just four or five months of rallying.)
In total, we’re advising a cautious stance; avoid being complacent, especially with growth stocks that are up huge during the past year and are now flashing abnormal action. That said, many pockets of the market still look OK, so you can hold onto any resilient, profitable stocks you have.
But for the moment, most of our emphasis is on capital preservation, at least until we see some real supporting action from the bulls.
SUGGESTED BUYS
With stocks moving all over the place, it’s hard to pinpoint any low-risk buys, but we still think many of the strong cyclical-related names that have had good runs would be tempting on dips.
Goldman Sachs (GS) has just run from 270 to 340, so we wouldn’t chase it here, but a pullback of another 15 to 20 points would be tempting, especially as the 50-day line (292 and rising quickly) catches up.
It’s a similar story with LPL Financial (LPLA), which emerged from its late-January pullback at 105 to rip to 135 before hitting resistance. A pullback into the mid-120s would be interesting as the 50-day line (119 and rising) catches up.
Energy stocks have also been strong—they’re extended here and likely will pull back, but any sort of dislocation could present an opportunity. One of our top ideas here is Cimarex Energy (XEC), which has zoomed from 50 to 65 after earnings; keep an eye on it for a shakeout into the mid-50s (seems like a long ways away but on the chart it’s just a couple of bad days).
SUGGESTED SELLS
As we mentioned in the first section, some of these names have run away on the downside. If you prefer to try to sell on a bounce you can, but we’d still advise selling some of your shares to respect the abnormal weakness these names have displayed.
Agilent (A)
Align Technology (ALGN)
Analog Devices (ADI)
Bill.com (BILL)
CarParts.com (PRTS)
Halozyme (HALO)
Inari Medical (NARI)
One Medical (ONEM)
Schrondinger (SDGR)
Shopify (SHOP)
Upwork (UPWK)
Zendesk (ZEN)
Zscaler (ZS)
SUGGESTED STOPS
AGCO (AGCO) near 115
AZEK Co. (AZEK) near 40
Cimarex Energy (XEC) near 52
Enterprise Product Partners (EPD) near 21.2
Farfetch (FTCH) near 52
Freeport McMoRan (FCX) near 30
General Motors (GM) near 48.5
Snap (SNAP) near 54.5
Sonos (SONO) near 31.5
Tapestry (TPR) near 35.5
Teck Resources (TECK) near 19