It’s been another positive week for the markets. We know the focus has been on the various news items—the Fed’s decision and statement, the U.S.-China trade talks this week and, today, the jobs announcement—but it’s all about the action of the market, which continues to back up the view that the sellers are out of ammo and the buyers are taking control.
As we write this, the S&P 500 and Nasdaq are up solidly this week (both are up 1.8% each), which was good enough to score new recovery highs on Thursday. That obviously keeps the intermediate-term trend pointed up, and we’re encouraged to see that the major indexes were only able to pull back modestly (the Nasdaq retreated 250 points after a 1,000-point run) before the buyers jumped back in.
Also, anecdotally, we think it’s a plus that few investors seem to be really embracing this rally. One example: Another $13.6 billion flowed out of equity mutual funds and ETFs last week, which is a pretty large one-week figure. And, looking back a bit, during the past six weeks (since the Christmas Eve bottom), a total of $19 billion has actually been yanked out of the market. We wouldn’t take action based on that, but it’s clearly a sign that investors aren’t anticipating amazing things going forward.
Of course, in the near term, anything is possible. Past studies of big rallies in January (like we just saw) show that February tends to be more sideways than anything, though like so many other indicators we’ve seen, it does portend bullish things down the road. And some intermediate-term breadth readings (84% of NYSE stocks are above their 50-day line) are also getting up there—again, these tend to be good longer-term but often coincide with some rest areas.
Our point is that you should continue to take it as it comes—there’s still a lot of overhead to chew through and all major indexes are still living below longer-term moving averages. We’re all for a continued run-up, but more likely there will be reverberations, be it for the market as a whole or for individual stocks during earnings season.
One last note, which we haven’t been able to mention in a while (but we’re glad we can): If you bought some stocks earlier in January and have some worthwhile profits, consider taking partial profits in a name or two, possibly selling one-third of your shares, moving your stop to breakeven (or above) and trailing a stop for the rest. It’s often a wise portfolio management move, especially after a few strong weeks in the market.
BUY IDEAS
Crocs (CROX 28) swam against the market’s tide for much of the fourth quarter and spiked to new highs in early January. But since then we’ve seen a modest retreat as shares approach their 50-day line. It’s possible that investors are rotating into other situations and that CROX could break down, but we view this as a nice risk/reward situation—we’re OK taking a position here with a relatively tight stop around 26.5.
Etsy (ETSY 54) was all over the place during November and December (40 to 55 to 42 to 58 to 42 again!), but after rallying back into the mid-50s last month, shares have finally begun to tighten up, holding in a three-point range for the most part during the past three weeks. Earnings are due out February 25, but you could start a position here (with a stop around 49) or on a push above 56.5 (with a stop around 51.5) and see what earnings brings.
Few investors love homebuilders, but the group’s action continues to intrigue us, as there could be a solid turnaround story underway. One of the best performers remains LGI Homes (LGIH 60), which, after surging back above its 200-day line early in January, barely pulled back and has nosed out to new recovery highs in recent days (albeit on light volume). If you don’t own any, you could start a position here or (preferably) on dips of a point or two, with a stop around 52.
We wrote up ServiceNow (NOW 220) in the issue this week, and lucky for us the stock staged a powerful earnings-induced breakaway gap on Thursday. It might seem extended, but NOW just etched a nice four-month base and volume on the breakout was fantastic. We’re OK taking a position here, but use a stop in the 195 to 200 area.
SELL IDEAS
Vanda Pharmaceuticals (VNDA 27) looked to be setting up nicely, but while the market rallied this week, the stock has dropped back below its 50-day line. It’s not headed to zero, but it’s not acting like a strong performer. We advise getting out here, around breakeven.
SUGGESTED STOPS
Atlassian (TEAM 102) near 90
Cooper Tire (CTB 35) near 32.5
Crocs (CROX 28) near 26.5
Dexcom (DXCM 140) near 131
Ionis Pharmaceuticals (IONS 58) near 55
ServiceNow (NOW 220) near 197
Tableau Software (DATA 130) near 121
Tencent Music (TME 14) near 13.2