After six very strong weeks on the upside, the sellers finally showed up in the middle of the week, with a combination of iffy U.S.-China trade reports and weak overseas economic reports pushing the indexes down a bit more than 2% from their Tuesday highs.
Our three main thoughts right now are (a) the pullback started at “obvious” resistance near the 200-day lines in many indexes and comes after a huge run, both of which bode well; (b) the dips so far in leading stocks have been relatively tame compared to their recent upmoves; and (c) the intermediate-term trend is still clearly up, and most indexes now have 2.5% to 3.5% of wiggle room before that trend would be called into question.
In other words, after six strong weeks, some retrenchment was likely, and so far, it’s been well within normal bounds.
That said, it wouldn’t surprise anyone if this retreat (or consolidation) lasted a bit longer—the Nasdaq, for instance, ran up 1,200 points from its lows, and while the odds don’t favor a massive retreat, a couple of weeks of correcting and consolidating is certainly not out of the question.
So what does it all mean? On the buy side, we’re fine with grabbing some shares of strong stocks on pullbacks, just be sure to keep your risk in check (i.e., have a reasonable loss limit, etc.) and to focus on the real leaders—maybe some off-the-bottom names are buyable on pullbacks, but we think the chances of success are higher for names that have exploded to new highs in recent weeks and are now retreating normally.
On the flip side, we’d try to hold most of your shares in your top performers. Partial profits (selling one-quarter or one-third of your shares) is fine, but if you have a tiger by the tail, we’d give that stock some rope. Sure, it’s possible this rally goes up in smoke and the market sags for a couple of months—but it’s more likely that these leaders’ powerful uptrends have more ways to go.
All in all, we remain mostly optimistic longer term, as enough bullish evidence has accumulated to think the path of least resistance is up. Shorter term, picking your spots makes sense, as does honoring your stops and seeing how this pullback unfolds. We’ll likely keep our Market Monitor at a level 7 next week.
BUY IDEAS
Array Biopharma (ARRY 22) has been basing since last June, but the stock exploded higher since reporting earnings on Tuesday, rallying to multi-year highs on very heavy volume. It’s extended to the upside, but we think you can either nibble here or try to pick up shares on dips to the 20 to 21 range, with a stop around 18-18.5. Good-looking breakout here.
Cronos (CRON 21) is about as wild a stock as you’ll see, but it certainly acts like one of (if not the) leader of the marijuana group right now. After a monstrous run from the start of the year (11 to 25!), shares have pulled back as low as 19 before finding support. Again, you could grab a few shares here, but we’re more interested in pullbacks—a dip into the 19 to 20 area would be tempting, with a loose stop in the 15 to 16 area. Just be sure to keep any positions on the small side given the stock’s volatility.
Its chart action hasn’t resulted in a specific pattern, but we like the action we’re seeing from Five Below (FIVE 127). Shares roared back from 90 to 123 in the first two weeks after the market bottomed, and have since crawled higher on light volume, with the past few days showing very calm and resilient trading. If you don’t own any, you could start a position here or on dips of a couple of points, with a stop in the 115 area.
Another potential pullback setup is Incyte Corp. (INCY 80), which blasted off in early January and, after clearing resistance near 70, ran as high as 83. Now it’s begun to digest those gains on very light volume ahead of earnings next week (February 14). If you’re aggressive, you can buy a small position here or on further dips (possibly toward the 25-day line, which is now at 78 and rising), and then see what earnings bring.
SELL IDEAS
Tableau Software (DATA 121) tripped its stop after earnings—it held up well late last year, but it really didn’t get going this year and now looks iffy. It’s a sell.
We’re also letting go of Vertex Pharmaceuticals (VRTX 180), which looks double toppy after a subpar earnings reaction; and Cooper Tire (CTB 33), which looks okay but doesn’t appear to be a leader.
SUGGESTED STOPS
Alteryx (AYX 69) near 63
Atlassian (TEAM 104) near 91
Azul (AZUL 29) near 27
Crocs (CROX 27) near 26.5
Dexcom (DXCM 145) near 133
Etsy (ETSY 51) near 50
Ionis Pharmaceuticals (IONS 58) near 55.5
Pinduoduo (PDD 26) near 25
ServiceNow (NOW 226) near 202
Tencent Music (TME 15) near 13.6
Trade Desk (TTD 143) near 133