It’s the last day of May, to which most investors (including us) say “good riddance,” as the major indexes are working on their fourth straight losing week. Including this morning’s plunge, the S&P has fallen as much as 6.9% from its high, while the Nasdaq has lost as much as 8.9% from its nadir.
That action obviously keeps the intermediate-term trend pointed down, as all of the major indexes we track are well below their 50-day lines. And there’s little question the selling pressures are broadening out—Wednesday saw the greatest number of new lows on the NYSE and Nasdaq (more than 200 each) since the December bottom, and today looks like a good bet to surpass that tally.
Longer-term, the evidence is still more positive than not, but the next week or two will be telling. Much more weakness could flip the longer-term trend to negative, and looking at past blastoff environments, retreats in the S&P 500 generally lasted a month or two and took the index down 5% to 9%. So far, then, this correction is “normal,” but we’ll be watching.
As for secondary indicators, we are seeing a meaningful improvement in many sentiment measures. For example, individual investors have now been pretty bearish three weeks in a row, which is similar to what has been seen at most market lows during the past three years; money flows remain hugely negative, including a whopping $22 billion outflow last week; and the put-call ratio hit its highest level of the year on Wednesday.
Given the length and depth of the correction so far, the fact that many leaders are still holding up decently well, the deteriorating sentiment and the horrid news environment, we certainly wouldn’t be shocked if the market found some support soon and started to repair the recent damage.
However, as we’ve written repeatedly, the onus remains on the bulls to step up to the plate. Most stocks and sectors are looking sour, and in recent days, the market’s had trouble bouncing for more than a few hours, never mind a few days, as some areas (oils, transports, chips) are in very rough shape.
Thus, you should remain cautious. We’re still OK holding most of your shares of your resilient, profitable stocks, but partial profits make sense, new buying should be limited (and/or kept to small positions) and holding a chunk of cash is advised. If and when the bulls retake control, there should be plenty of opportunities, but until then, continue playing it safe.
BUY IDEAS
Armstrong World (AWI 89) hasn’t made much progress during the past few weeks, but that earns it a gold star in this environment. Moreover, the stock has set up a lower-risk entry—you could start with a small position here, use a tight stop (percentage-wise) near 83 and, ideally, look to average up on a push above 91 (assuming the market has found its footing).
We just wrote about Harris (HRS 186) a month ago, but it continues to act great—the stock broke out from a year-long base in late April and marched higher four weeks in a row after that. What we’d be looking for is some market-induced weakness that drops HRS down a few bucks—look for a dip into the 182 area, with a stop around 172.
Paycom Software (PAYC 211) has had every excuse to give up the ghost in recent weeks—it’s had a huge run in recent years, a big upmove since February, and, of course, the market has been weak in May. But shares have calmly held their 25-day line all month and are actually perking up so far this morning. If you don’t own any, you could consider nabbing up a few shares, here, with a stop around 195.
SELL IDEAS
Workday (WDAY 205) has had a solid overall run and isn’t breaking any key support, but after this week’s earnings-induced drop, we think it’s OK to take partial profits, and use a stop in the 190 area (give or take) for your remaining shares.
As for outright sells, the following have tripped their stops this week are kicked off the list:
Kansas City Southern (KSU 111)
Lennox (LII 265)
Lululemon (LULU 163)
Manpower (MAN 86)
Transdigm (TDG 443)
SUGGESTED STOPS
Advanced Micro (AMD 28) near 25.8
Avalara (AVLR 69) near 61
Chipotle Mexican Grill (CMG 662) near 625
CoStar Group (CSGP 509) near 488
DR Horton (DHI 43) near 42.5
First Solar (FSLR 59) near 56.5
Heico (HEI 119) near 106
HubSpot (HUBS 174) near 164
LendingTree (TREE 371) near 355
Match.com (MTCH 69) near 62.5
MercadoLibre (MELI 565) near 515
Mercury Systems (MRCY 69) near 66
Paycom Software (PAYC 212) near 194
Paylocity (PCTY 101) near 92
PayPal (PYPL 109) near 104
Pilgrim’s Pride (PPC 25) near 24.5
Planet Fitness (PLNT 76) near 69
Sea Ltd. (SE 28) near 26
ServiceNow (NOW 237) near 248
Sinclair Broadcast (SBGI 261) near 50.5
Starbucks (SBUX 54) near 74.5
TopBuild (BLD 77) near 73
Veeva Systems (VEEV 152) near 136
VeriSign (VRSN 194) near 188
Woodward (WWD 107) near 102
Workday (WDAY 205) near 191
Zendesk (ZEN 84) near 82
Zoom Communications (ZM 81) near 69
Zscaler (ZS 68) near 65