First off, a heads up: Due to some scheduling issues this morning and our company’s holiday party this afternoon, I wrote this before the open on Friday, though I factored in writing this before the open, taking into account the expected weak market open. None of the overall advice (or stops) will change based on the dip; prices are as of last night’s close.
It’s been a relatively choppy week, with Monday seeing many major indexes briefly sinking to new lows before reversing higher, a modest bounce mid-week, and this morning looking like another sharp drop. Following the open, it appears the S&P 500 will be down a fraction of a percent on the week, while the Nasdaq will be up by a similar amount.
Looking at the charts, nothing has really changed. Many major indexes are hovering around their late-October lows, though small- and mid-cap indexes have been weaker, as both notched new closing lows yesterday. (The S&P 600 SmallCap index closed yesterday 19% off its late-August all-time peak!)
Bottom line, the trend of the indexes (and most individual stocks) remains down, so you should continue to patiently sit tight in a mostly defensive stance.
Looking past the indexes, we’re keeping an eye on three main things. The first is the action of financial stocks (symbol XLF)—they’ve turned very weak of late, “leading” the market lower since the late-November rally fizzled out. We rarely directly recommend banks, of course, and we’re not going to form a market opinion based solely on the XLF. But the odds of a market low would improve if the XLF found support.
The second thing is the action of potential leading stocks, many of which continually pop higher when the pressure comes off the market for a day or two, and give ground only grudgingly during ugly market sessions. If they can continue to withstand market weakness, it would back up the view that new leadership is (slowly) coming together, a positive sign.
And the third thing we’re watching is sentiment in general. As opposed to October, when most people were in shock and wondered what was going on, today there’s a barrage of bad news and uncertainties nearly every day (trade rumors, Brexit shenanigans, possible government shutdown, Fed policy, etc.). And it’s having an effect—last week saw the largest outflow of money from equity mutual funds and ETFs since at least 1993! Some of that is due to seasonal influences, but even so, it’s noteworthy.
Basically, we’re looking for more secondary pieces of evidence (potential leadership, sentiment, support in financial stocks) to fall into place, which, if all goes right, could set the stage for the primary evidence (trend of the indexes, breakouts from leading stocks) to turn up.
Right now, though, we remain in a mostly watch-and-wait mode as we wait for the sellers to run out of ammo and the buyers to put up a fight. Hold plenty of cash and keep new positions on the small side.
BUY IDEAS
Ciena (CIEN 35) is a stock that should definitely be on your watch list. The stock broke out of a three-year base in August and has held up well throughout the market correction (including a push to higher highs in early November). And yesterday, shares briefly popped to new highs following a better-than-expected quarterly report. If you want to nibble here with a stop in the mid 31s, that’s fine, but we’d save any large buying for when the market is back in an uptrend.
A few recent IPOs continue to hold up well, with Elastic (ESTC 77) being one of them—shares popped to new highs at the start of December, pulled back reasonably last week and remain above their November lows even as the indexes sink. Like most resilient stocks, you could nibble here (but use a loose stop near 67), or just keep a close eye on it.
PayPal (PYPL 88) actually hit its correction low back in early December, retested that level last month and is miles above those lows today (much better than most stocks and indexes). We think PYPL is setting up to be a steady leader of the next market advance—a small buy in the mid-ish 80s with a stop around 81 is one idea, though we’re more interested in potentially buying a breakout above 90 down the road when the market is healthy.
Tableau Software’s (DATA 131) strength is hard to ignore—the stock hit a low near 100 in November, but is now trading 30% above that (round numbers)! We can’t say it’s a good buy up here, even if the market was in good shape, but a shakeout of five or six points would be tempting to nibble on, albeit with a stop around 115.
SELL IDEAS
Canada Goose (GOOS 55)
Decker’s Outdoors (DECK 123)
Dine Brands (DIN 85)
Genomic Health (GHDX 70)
Mosaic (MOS 31)
Petrobras (PBR 14)
Repligen (RGEN 59)
SUGGESTED STOPS
Acacia Comm. (ACIA 42) near 40
Alteryx (AYX 63) near 53.5
Amarin Corp. (AMRN 17) near 15.5
Amedisys (AMED 130) near 117
Delta Air Lines (DAL 54) near 52.5
Ciena (CIEN 35) near 31.5
Cooper Tire & Rubber (CTB 31) near 30
Crocs (CROX 25) near 23
Eli Lilly (LLY 115) near 108
Exact Sciences (EXAS 68) near 65
Glaukos (GKOS 64) near 58
Guardant Health (GH 42) near 38
Mellanox Technologies (MLNX 91) near 87
MongoDB (MDB 90) near 77
Omnicell (OMCL 69) near 67
PayPal (PYPL 88) near 81
Spirit Airlines (SAVE 61) near 56
TripAdvisor (TRIP 61) near 57.5
United Continental (UAL 87) near 86
Veeva Systems (VEEV 92) near 87
Zebra Tech. (ZBRA 173) near 161