First, a scheduling note: Due to the Christmas holiday, there will be no Top Ten issue next week or Movers & Shakers update next Friday (though, if the market remains crazy, we might send out something just to keep in touch). We will be checking emails, though, so don’t hesitate to shoot over a question if you have it. If we don’t hear from you, Merry Christmas and Happy New Year!
As for the market, it’s been another dreadful week. Blame it on the Federal Reserve if you want, but whatever the reason, the fact is the sellers remain in control and the trends are pointed down. As we write this, the S&P 500 is down a huge 4.9% this week alone, while the Nasdaq is off 5.5% since last Friday’s close.
Right off the bat, we are getting questions about whether this is a bear market, is a recession coming soon, etc. Honestly, we’re not really into labels—you can call the decline whatever you want, but labeling something doesn’t really help your portfolio. The point is to stay in gear with the market’s trends, which turned down in October and have mostly been down ever since.
Back to the evidence, we are starting to see some historic oversold readings. Yesterday, for instance, saw more than 1,100 stocks on both the NYSE and Nasdaq hit new 52-week lows yesterday, which is very rare. On the Nasdaq, the new low figure was the highest since 2008, and larger than all non-2008 readings of the past 20 years.
Sentiment-wise, yesterday also saw the largest total put-call ratio in at least a couple of decades; we’ve seen two straight weeks of very pessimistic readings from the AAII survey, which historically has led to solid returns two to three months down the road; and investors are stampeding out of equity funds and ETFs, with $34.6 billion taken out in the week ending Wednesday, on top of $46 billion the week before (which was the largest in 25 years!).
Finally, price-wise, the magnitude of the recent declines has been giant—since the December 3 peak (remember the G20-induced bounce?), the Nasdaq has fallen as much as 14%, with the S&P 500 down around 13%.
What does it all mean? To us, it certainly smells like we’re getting close time-wise to some sort of bounce; we say time-wise because there’s nothing that says the indexes can’t cascade another few percentage points in the days ahead before finally finding support. Still, the intense worry/bad news/oversold readings that we’re seeing have historically had a solid track record of popping up near short- to intermediate-term market lows.
However, given that we’re just now seeing a peak in downside momentum, the next rally (whenever it starts) is unlikely to lead to a new bull move. At best, the odds favor some backing-and-filling, retests and the like … or another leg down to lower lows.
Of course, at this point, we haven’t even had an up day, so we don’t advise looking that far down the road. If you’re in a highly defensive stance and want to take a small stab at a stock or two, that’s fine, but we continue to advise holding a bunch of cash and honoring stops. We’ll be watching to see if the market can find support and what stocks and sectors bounce the best once that happens.
BUY IDEAS
We remain impressed with Bilibili (BILI 15)—while most other IPOs that popped in June have fallen apart, BILI has actually been creeping up since early August! And yesterday, it actually closed up a few pennies and is still above its 50-day line. You can grab shares here with an ultra-tight stop around 13.5, or just keep an eye on it—an eventual move above 16.5 (in a healthier market) would be bullish.
Part of it might be because of buyout rumors, but it’s hard to ignore Mellanox’s (MLNX 89) resilience—after a huge rally in late October and early November, the stock has basically chopped straight sideways, though it is approaching our stop. Still, we’re not opposed to taking a stab at it here (with a very tight stop) if you want to.
Planet Fitness (PLNT 52) has dipped normally to its 50-day line and to price support in the low 50s. So far, it looks like big investors are hesitant to sell given the firm’s non-economically sensitive business (cheap gym memberships) with a reliable growth outlook. Keep it on your watch list, or if you want in, nibble here with a stop near 47.
We still think Workday (WDAY 152) has the makings of a liquid leader—the pullback this month has been sharp, but for perspective, the stock is still hanging around its prior all-time high (from August) and is above its 25-day line. Keep watching it, or if you’re a bottom fisher, you can consider taking a shot at it around here with a stop near 140.
SELL IDEAS
Given the environment, the big purpose of Top Ten is to have a running list of potential new leaders of the next sustained upturn (and maybe to nibble on a few names along the way). However, with that in mind, having constantly updated stops along the way serves to get us “knocked out” of stocks that are taking hits but may, in the big picture, still be showing resilience. This week, MDB and PYPL are two examples.
Thus, we’ll follow the rules this week—anything that tripped its stop is listed as a sell. And during the next uptrend, we’ll again be using recommended stops, and of course, will continue to list loss limits in every issue for every new recommendation. But as long as the market is sinking like a stone, we’re likely to be using fewer updated stops so we can keep coverage of more names that could get going down the road.
As always, we’re happy to provided up-to-date advice anytime—email me directly at mike@cabotwealth.com.
Back to today, here’s this week’s list of sells, though if you still own them, AYX, MDB, PYPL and SAVE might be worth giving a little rope:
Acacia Comm. (ACIA 38)
Alteryx (AYX 54)
Amarin Corp. (AMRN 15)
Amedisys (AMED 111)
BioTelemetry (BEAT 55)
Delta Air Lines (DAL 51)
Eli Lilly (LLY 109)
Exact Sciences (EXAS 59)
Glaukos (GKOS 55)
Guardant Health (GH 36)
MongoDB (MDB 80)
Omnicell (OMCL 61)
PayPal (PYPL 82)
Shopify (SHOP 130)
Spirit Airlines (SAVE 56)
TripAdvisor (TRIP 55)
United Continental (UAL 84)
Veeva Systems (VEEV 85)
Zebra Tech. (ZBRA 151)
SUGGESTED STOPS
Ciena (CIEN 33) near 31.5
Cooper Tire & Rubber (CTB 31) near 30
Crocs (CROX 24) near 23
Mellanox Technologies (MLNX 89) near 87