The market started this week with another sharp selloff, continuing the May weakness and bringing the major indexes down 7.65% (S&P 500) to 10.8% (Nasdaq) from their peaks. But since Monday, the action has been excellent, and the major indexes are working on solid gains, in the 3.5% to 4.0% range.
Starting with our indicators, not a whole lot has changed-the intermediate-term trend remains down for most major indexes (all five major indexes we track are still below their 50-day lines), sectors and individual stocks (60% of NYSE stocks are south of their 50-day lines). Thus, we’re still advising a cautious stance.
That said, we are encouraged by the overall picture—in fact, the title of my latest Cabot Growth Investor issue this week was “Pieces are in Place,” referring to the fact that the evidence is coming together to support a new leg up.
Those pieces are, first, a “normal” correction thus far. While not pleasant, the declines in the major indexes fit well within the context of the first correction in a blastoff environment. Moreover, while last week came close, our longer-term trend model remains positive, which is another sign this is a correction and not a meltdown.
Second, sentiment has turned sharply negative. Whether it’s surveys of individual investors (as bearish today as they have been at many major lows of the past 10 to 15 years), money flows ($34 billion yanked out of equity funds over the past two weeks alone) or other measures, it’s clear that the five-week correction, accompanied by tons of bad headlines (tariffs, economy, antitrust, etc.), convinced many investors to just quit.
And third, despite some rockiness, we’re impressed with how many growth-oriented stocks either resisted the entire decline, or got hit but have quickly snapped back.
All of these are good reasons not to get overly defensive—we do think there’s a chance we’ve seen a workable low. But we still need to see the trend turn positive and some other things fall into place (the broad market is still iffy; defensive stocks are some of the best performers) before getting aggressive on the buy side. Net-net, we’re likely to bump up our Market Monitor a notch or two come Monday (from a 4 to a 5 or 6).
BUY IDEAS
If the market does get going, two stocks we wrote up this past week look like good bets to be leaders. Both are above their buy ranges, but given the market’s action this week, we’re OK nibbling here or preferably on dips.
The first is Advanced Micro (AMD 32), which acted resiliently for many weeks and, as soon as the market started to rise this week, the stock turned strong, breaking out on huge volume yesterday. The other is Snap (SNAP 14), which actually broke out on Tuesday, the first day off the market’s low! Like AMD, it’s extended, but the power is impressive—nibbling here or on dips of a few dimes is an idea.
Tandem Diabetes (TNDM 71) hasn’t joined the party this week, but it’s set up in a nice base and is showing some early signs of tightening up. You could consider nibbling here with a stop near 64, though we’re more interested in buying after a big-volume leap above 73.
Recent IPOs can be very, very tricky, but Zoom Communications (ZM 96)has an interesting pattern. After a great first few weeks that saw the stock rally 50% from its opening price to its mid-May high, shares pulled back sharply but held in the mid 70s, and today, after a great earnings report, it’s zooming (pun intended) to new highs. Of course, a move of 10% on a stock like ZM would be common, but if you want to buy a small amount here or on dips, and use a loose loss limit in the upper 70s, we’re OK with that.
SELL IDEAS
After a few weeks with many sells, we have none this week—if the rally continues we could let go of some laggards, but right now, we’re holding what we have.
SUGGESTED STOPS
Advanced Micro (AMD 32) near 27.4
Ascendis Pharma (ASND 123) near 115
Avalara (AVLR 73) near 62
Chipotle Mexican Grill (CMG 701) near 625
CoStar Group (CSGP 542) near 500
First Solar (FSLR 62) near 58
GW Pharmaceuticals (GWPH 175) near 165
Heico (HEI 127) near 111
LendingTree (TREE 400) near 360
Match.com (MTCH 71) near 63
MercadoLibre (MELI 597) near 520
Ollie’s Bargain Outlet (OLLI 94) near 91
Paycom Software (PAYC 222) near 199
PayPal (PYPL 114) near 105
Pilgrim’s Pride (PPC 27) near 24.9
Planet Fitness (PLNT 79) near 70
Sea Ltd. (SE 31) near 26
ServiceNow (NOW 275) near 252
Sinclair Broadcast (SBGI 53) near 51
Starbucks (SBUX 83) near 77.5
Tandem Diabetes (TNDM 71) near 64
TopBuild (BLD 81) near 74
Veeva Systems (VEEV 162) near 139.5
VeriSign (VRSN 208) near 191
Viasat (VSAT 91) near 86
Woodward (WWD 114) near 103.5
Zoom Communications (ZM 96) near 77
Zscaler (ZS 75) near 67