First off, we’re heading into the long Memorial Day weekend, so your next issue of Top Ten will be published next Tuesday evening, May 28. Enjoy your BBQ, beers and (for those of you south of us) the beach!
On to the market, the major indexes have had another rough go of it, notching their third straight weekly decline. Before the opening bell this morning (futures are indicating a modestly higher open), the S&P 500 is sitting on a 1.3% weekly loss, while the Nasdaq is off a more severe 2.4%, driven in large part by the horrid action from chip stocks (down 5.6%!), which have been caught up in the trade war.
More important to us than the weekly moves are the charts. And on this front, not much has changed—all five major indexes we track are below their 50-day lines, telling us the intermediate-term downtrend remains in place. The longer-term evidence remains positive, so we’re not hiding in the bunker, but right now it’s best to be cautious—pruning your worst performers, holding some cash and going easy on the buy side all make sense.
Digging deeper, it seems like the correction has been broadening out—many of the resilient stocks took hits this week and we noticed the number of stocks hitting new lows on the NYSE and Nasdaq both reached their largest levels yesterday. There are no guarantees, but the action does imply that more time (and possibly lower prices) is likely required before the selling pressures exhaust themselves.
That’s not to say everything out there is looking bad. For instance, while many leading stocks have found sellers this week, most are still showing solid relative strength—while the Nasdaq fell beneath its May 13 low yesterday, most names we track are well above their nadirs from that date.
Moreover, we are starting to see a bunch of sentiment measures turn in a hurry—the percent of AAII survey respondents that were bullish came in at just 25% this week, the second lowest figure since late 2016. The equity put-call ratio has risen to an elevated level. And money flows have turned decisively negative, with more than $30 billion being yanked out of equity funds and ETFs during the past five weeks.
Long story short, the odds continue to favor this being a bull market, and the resilience (so far) of many leading stocks and quickly worsening sentiment tell us the next leg up should be a good one. But right now, the sellers are still in control, and there’s nothing that says that can’t continue for a while longer, so it’s best to play some defense and patiently wait for the bulls to retake control.
BUY IDEAS
Disney (DIS 133) hasn’t done too much since its earnings gap in mid April, but we take that as a good thing—after a selloff late last month, the stock has stabilized in the low 130s on light volume, and the 50-day line (125 and rising) is catching up. If you want in, we’re OK starting a position here or on dips, with a stop near that 50-day line.
It’s always tricky to highlight a bull market stock during a market downturn, but Blackstone (this week’s Top Pick) looks good, and LPL Financial (LPLA 84) has held up very well, too—in fact, the stock actually nosed out to new highs on Wednesday before pulling back. There should be good support in the wide 78 to 82 area, so nibbling on further dips with a stop around 76 is fine with us.
SELL IDEAS
We have three outright sells this week, mostly via stop violations:
Abercrombie & Fitch (ANF 24)
Teradyne (TER 42)
Universal Display (OLED 150)
SUGGESTED STOPS
Advanced Micro (AMD 26) near 25.8
Avalara (AVLR 68) near 60
Chipotle Mexican Grill (CMG 667) near 625
CoStar Group (CSGP 514) near 485
DR Horton (DHI 44) near 42.5
First Solar (FSLR 57) near 56
Heico (HEI 104) near 98.5
Kansas City Southern (KSU 121) near 115.5
LendingTree (TREE 373) near 355
Lennox (LII 276) near 260
Lululemon (LULU 170) near 163
Manpower (MAN 91) near 87.5
Match.com (MTCH 69) near 62
MercadoLibre (MELI 581) near 510
Mercury Systems (MRCY 69) near 66
Paycom Software (PAYC 207) near 193
Paylocity (PCTY 100) near 91
Planet Fitness (PLNT 74) near 69
Sea Ltd. (SE 31) near 26
ServiceNow (NOW 265) near 247
Sinclair Broadcast (SBGI 55) near 50.5
Starbucks (SBUX 76) near 74
Transdigm (TDG 448) near 444
Veeva Systems (VEEV 141) near 129
VeriSign (VRSN 195) near 186
Woodward (WWD 111) near 102
Workday (WDAY 205) near 191
Zendesk (ZEN 87) near 81.5
Zoom Communications (ZM 79) near 69
Zscaler (ZS 73) near 64