Interesting times! It’s been an encouraging week in our books for the market, partly due simply to the continued rebound in the major indexes—even after this morning’s dip, the S&P 500 (up 2.4%) and Nasdaq (up 3.2%) are up solidly so far on the week.
Just as encouraging, though, is what we’ve seen from market breadth during the past couple of weeks—the number of stocks hitting new lows have effectively vanished in recent days, falling from over 1,000 back before Christmas (on both the NYSE and Nasdaq) to the high single or low double digits each day.
More importantly, the two-week rally off the Christmas Eve low produced a rare “blast-off” signal, as the number of advancing stocks on the NYSE outnumbered declining stocks by an average of 2-to-1 over a 10-day span. It’s very rare, and in the past, has preceded excellent market gains during the next six to 12 months, and also appeared near the start of many major bull phases.
That said, we aren’t going to ignore our primary trend indicators, either. Right now, the intermediate-term trend of the market is still down—most major indexes have poked their heads above their 25-day lines, but those averages are still falling. And next up is resistance around their declining 50-day lines.
As for individual stocks, the action recently has been very solid—most of the resilient names during the market correction have begun to perk up—but it’s still very early. Indeed, while the number of stocks hitting new lows has dried up, there remain just a handful of names reaching virgin turf, too.
All together, we’re growing more optimistic and advise slowly extending your line; we bumped our Market Monitor up a notch to 4 (out of 10) last week, and on Monday, it will likely be up to a 5 or 6. That said, given that the trends are down, we’re also making sure not to get too far over our skis—the next pullback (whenever it starts) will be telling, with a grudging retreat boding well, while a sharp, multi-day slide would imply sellers are still lurking.
Right now, though, we think there’s enough positive evidence out there to begin putting some money to work, and then watching the indexes (to see if the trend can turn up) and individual stocks (to see if more can break out) closely to see if the good vibes can continue.
BUY IDEAS
Atlassian (TEAM 95) was one of the first growth stocks to break out of its base during this rally, lifting above resistance near 90 on good volume on Monday. There’s still some overhead to chew through in the upper 90s, but starting a position here or on dips of two or three points, with a stop in the lower 80s, is an idea.
Yes, it’s a bit thinner and moves around a lot, but we continue to like the look of Elastic (ESTC 75), which spiked the first few days of the year and is starting to digest that move. You could nibble here, but another option is to start a position on a move above 78, with the idea of adding more above 82 down the road should the market’s trend turn up.
Pinduoduo (PDD 26) lifted out of a low-level base (i.e., lower in its overall post-IPO basing structure) on good volume this week. It’s very volatile and sure to get tossed around in any U.S.-China trade rumors, but we’re OK nibbling here or on dips of a few dimes with a stop around 22.5.
SELL IDEAS
We have no outright sells today, though we’re keeping a close eye on Deckers Brands (DECK 114), which is testing our loss limit; Cooper Tire (CTB 33), which is creeping higher on low volume after a big early-December drop; Franco-Nevada (FNV 70), which is holding support near 68 but is lagging some other gold stocks; and Starbucks (SBUX 63), which is starting to live below its 50-day line (though it’s still holding its recent lows).
SUGGESTED STOPS
As we mentioned previously, we’re leaning against listing stops right now, since all positions are either small or stocks are mostly being used to add to our watch list. If you do buy, though, you should definitely use the loss limits listed in each issue, and don’t hesitate to email me directly (mike@cabotwealth.com) if you have specific questions.
Should our list of recommended stocks grow and the market kick into gear, we’ll be back to listed stops per usual, and if something looks sick and should be sold (or taken off your watch list), we’ll list it as a sell here and/or in the Monday issue. But right now we’re casting a big wider net as we look to identify the leaders of the next advance.