The sellers really took control last week, punishing many resilient stocks and pulling down the major indexes. And the distribution continued this week, with the major indexes (especially the Nasdaq) sliding persistently. All told, the market has fallen eight straight days and most indexes are now at three-month lows.
Obviously, a lot of attention is being paid to next Tuesday’s U.S. election; what was thought of as a blowout election two weeks ago suddenly looks tighter. Because the market hates uncertainty, it’s certainty not helping the bulls’ cause.
But you should be careful about getting too involved in why the market is heading south. It’s certainly possible the election is the main reason for the recent selloff, and thus, we could see a Brexit-type snapback following next Tuesday’s results. But it’s also possible the market has simply topped out for now and wants to go lower regardless of what happens with the election.
In other words, just stick with the evidence, which is telling us to be borderline defensive right now until the selling storm passes. Plenty of cash and very selective and small buying makes sense for now.
None of this is to say you should stick your head in the sand. Longer-term, there remain a few rays of light. We’re encouraged, for instance, to see many recent earnings winners hold their gains in fine fashion, despite the straight-down action in the market.
As for the major indexes, the S&P 500, S&P 600 (small caps) and S&P 400 (mid caps) have all come down a bit below the top of the prior, year-long ranges and are standing right near their long-term 40-week moving averages. (The Nasdaq is still handily above its own 40-week line.) In other words, the longer-term trend isn’t broken.
Plus, we’ve seen meaningful signs of panic this week, with things like the VIX and put-call ratios reaching their highest levels since June. These are secondary to price/volume, of course, but in recent years, such spikes tended to occur near lows.
These rays of light are telling you to keep an open mind going forward. Yes, it’s been a tough couple of weeks, but given the above readings and the fact we have a well-known event coming up, it pays to be open to whatever the market throws at us (good or bad) going forward.
BUY IDEAS
The “good” part of a weak market is that you can spot resilient stocks easily. As a reminder, all buys should be small size-wise until the market finds its footing.
We continue to like the action in Adobe (ADBE 107), which actually rose yesterday despite releasing some conservative guidance for next year. It’s still north of its 50-day line and holding most of its earnings gap from September. Nibbling here with a tight stop near 102 is an option.
We’re impressed with the stubbornness of FMC Technologies (FTI 33)—while most oil stocks have broken down, FTI hasn’t given up much and remains in the sharp uptrend that kicked off in late-September. Dips toward 31.5 would be tempting, with a stop near 29.5.
Momo (MOMO 24) is very volatile, so you’d have expected it to have keeled over by now, but, while it has taken on some water, shares are generally holding their 50-day line and are in the middle of a wide trading range. You could nibble here, though we prefer to just keep it on the watch list and look for a resumption of its uptrend when the market rebounds.
Netflix (NFLX 122) is in pole position to be a liquid leader once the market gets going. We like the fact that NFLX not only had a great day on earnings, but also had three follow-on big buying days. We’re not opposed to nibbling around here with a stop in the 113 range.
PayPal (PYPL 41) is another liquid stock that’s holding up well—it did give up a chunk of its earnings gains, but it’s held firm over the past five days and is still above its 25-day line. This looks like a potential slow, steady winner during the next uptrend. You could nibble here with a stop near 39, or just keep an eye on it.
Zayo Group (ZAYO 32) has actually been trending solidly higher since mid-September and remains above its 25-day line. It could shake out if the market remains weak, but dips below 31 would be tempting, with a stop near 29.5.
SELL IDEAS
Apache (APA 56), Diamondback Energy (FANG 93), NetApp (NTAP 32), Parsley Energy (PE 33), Shopify (SHOP 40), Tata Motors (TTM 38) and Weibo (WB 45) all tripped their stops and are now sells.
We also think ICON plc (ICLR 77) and Match.com (MTCH 15) are sells based on their action in recent days.
Lastly, NetEase (NTES 243) is a good candidate for partial profits—if you have a solid gain, consider selling one-third to one-half of your shares, while giving your remaining shares some wiggle room.
SUGGESTED STOPS
Adobe Systems (ADBE 107) near 103
Aerie Pharmaceuticals (AERI 33) near 31
Amazon (AMZN 767) near 760
Applied Materials (AMAT 28) near 27.5
Arista Networks (ANET 82) near 79
Autodesk (ADSK 68) near 67
Cirrus Logic (CRUS 55) near 49.5
Copa Holdings (CPA 89) near 83
Finisar (FNSR 28) near 26
Green Plains Energy (GPRE 26) near 24.5
HDFC Bank (HDB 69) near 68
ICU Medical (ICUI 139) near 133.5
Micron Technology (MU 17) near 16
NetEase (NTES 243) near 235
Nvidia (NVDA 68) near 63.5
Patterson-UTI Energy (PTEN 21) near 20.5
PRA Health Sciences (PRAH 53) near 49.5
Quanta Services (PWR 28) near 27
RPC Inc. (RES 17) near 16
Symantec (SYMC 25) near 23
TD Ameritrade (AMTD 34) near 33