After a couple of months of strong action, the long-awaited market pullback has gotten underway, and not surprisingly it’s been a bit of a doozy. The S&P 500 and Nasdaq are down about 3% (plus or minus) on the week, and the broad market has been even weaker, with small-cap indexes down around 6.5% since peaking two weeks ago.
We have a few thoughts on the recent action.
First, from a market standpoint, we think the pullback looks normal to this point. When they occur, retreats aren’t usually mild and easy to take, but sharp and scary, and that’s what we’re seeing, with some straight-down action in recent days. But all of the major indexes are still in an intermediate-term uptrend, and relative to the January/February upmoves, this dip looks reasonable.
Throw in the blastoff signals received in January and February, and the odds are still in favor of higher prices looking down the road.
Second, though, we wouldn’t be surprised if the rough sledding continued in the near term—after nine-plus weeks up, it makes sense that it will take more than just a few sessions for stocks to shake out. That doesn’t mean the market will head straight down for another two or three weeks (that would be abnormal), but further wobbles and news-driven moves wouldn’t be a surprise.
Third, individual stocks have generally fared worse than the major indexes so far—not unusual given the sharp run-ups to start the year, but worth watching. We started to see some selling on strength last week, and now we’ve seen a good number of names dip to support (often 50-day moving averages).
The good news is that we’ve seen very little in the way of true abnormal action or intermediate-term breakdowns; so far, most leaders are holding where they’re “supposed to.” Plus, of course, a ton of stocks look just fine. As usual, we’ll take it as it comes—if certain would-be leaders crack, we’ll sell, while trying to stick with the most resilient of names, which will likely lead the next upmove.
Putting it all together, our advice is to remain generally bullish, but to tighten some stops/loss limits on weak performers and losers; be more discerning on the buy side (look for better entry points, aim to enter on weakness more than breakouts, etc.); and consider booking partial profits in some names if you haven’t already.
To respect the action, we’re likely going to knock our Market Monitor down another notch to a level 6—still positive, but reflecting our view that the near term could continue to be tricky and challenging.
BUY IDEAS
The type of setup we’re looking for right now is (a) stocks that have had strong persistent advances that clearly took them to new highs, (b) didn’t stall out much in late February and (c) have pulled back reasonably, both in terms of price and volume. Even if they’re not at great entry points this minute, you could target further weakness as a chance to get in.
Epam Systems (EPAM 158) is a good example, with the stock rising in a straight line from the market bottom through all of February. It’s barely pulled back so far, which is encouraging; if you really want in, you could nibble here. But we’d prefer to look for a dip to the 25-day line (now near 154), using a stop around 143.
Incyte Corp. (INCY 82) has pulled back sharply this week after a good run, so like most things, some further wobbles wouldn’t surprise us. But we like the low volume on this retreat, and given that this is the first retreat since it blasted off in late December, odds favor it being buyable. We’re OK picking up shares here, albeit with a relatively tight stop around 76.5.
iRobot (IRBT 121) boomed from around 90 to start the year to 132 earlier this week before finally beginning to give up some ground. As with most names, a rest period could easily be in order, but this sharp, knockout-type action looks intriguing—a dip below 120 would be tempting, with a stop just under 110.
Shopify (SHOP 186) continues to look interesting, in that it advanced right through early this week (no stalling-out action) and has held up well in recent days, despite the selloff in growth stocks. We’d be looking for a shake down to the 25-day line (near 180), with a stop around 165 (near the rising 50-day line).
Spirit Aerosystems (SPR 95) didn’t get as far above prior resistance as we’d prefer, but it’s also possible the stock’s long 2018 decline already knocked out most of those weak hands. And the recent action has been excellent—an accelerating advance through this Monday, followed by a very reasonable retreat. We’re OK buying some here or on further dips to 94, with a stop around 87 or so.
SELL IDEAS
We don’t usually sell stuff right after a recommendation, but occasionally it’s called for, and Novocure (NVCR 47) is one of those. The stock had enjoyed a persistent advance for a few weeks, and pushed out to new highs post-earnings last Friday. But this week has been a mess, with a sharp, big-volume selloff. That doesn’t mean the stock is going to get cut in half, but it looks to us like it will at the very least need time to build a new launching pad. If you want to give it a couple more points, that’s fine, but we’re selling and looking elsewhere.
We’re also weary of Glaukos’ (GKOS 65) failed breakout—it found some support this morning, but we’re going to sell and look for stronger situations.
We’re also selling Lululemon (LULU 144), which hasn’t been able to get going despite a solid setup in recent weeks.
SUGGESTED STOPS
Atlassian (TEAM 104) near 97
Elastic (ESTC 83) near 82
Entegris (ENTG 35) near 33
Etsy (ETSY 67) near 61.5
Incyte Corp. (INCY 82) near 76.5
iRhythm Tech (IRTC 87) near 85
LendingTree (TREE 308) near 287
LPL Financial (LPLA 72) near 70
LGI Homes (LGIH 59) near 56
Match.com (MTCH 53) near 50.9
Mirati Therapeutics (MRTX 66) near 61
Netflix (NFLX 347) near 330
Planet Fitness (PLNT 63) near 57.5
Pinduoduo (PDD 28) near 27
ServiceNow (NOW 231) near 210
Tencent Music (TME 17) near 15.5
Veeva Systems (VEEV 113) near 109