It’s been a very interesting week and a half to say the least, with an over-the-cliff decline in the market that took the S&P down more than 6% (and the Nasdaq down more than 7%) in just four days, decisively cracking the intermediate-term uptrend as all indexes (and most stocks) dove below their 50-day lines.
However, the action since then has been very encouraging. The major indexes rebounded a bit more than halfway back and, even including this morning’s retreat, most are still hanging around (on or a bit below) their 50-day lines. Even more impressive has been the action of a bunch of growth stocks—many fresher names held support on the way down, and we’ve also seen a good number of earnings gaps higher in recent days, even when the market was falling apart.
So was that it? Just a three-day shakeout and we head higher from here? No, we can’t conclude that at this point—even with the bounce, the intermediate-term trend is basically neutral here. Indeed, the S&P and Nasdaq recouped a bit more than half of their prior declines, which is normal bounce-type stuff. And that means it’s possible we have another leg (or two) down in this correction, especially if some more negative headlines emerge.
But, as we wrote above, the action is encouraging, especially when it comes to individual stocks—it certainly seems like there are a bunch of names that want to head higher if the market can get out of its own way.
You shouldn’t be in the storm cellar and we aren’t opposed to a small buy in a resilient stock here or there, but remember that good stocks can go bad in a hurry in a bad market. Thus, until we see the bulls really take control, it’s best to remain cautious—keeping buys on the small side, holding some cash and pruning losers/laggards from your portfolio.
That said, it’s also key to stay flexible. If the trend turns up, we’ll certainly turn more constructive, but we need to see it happen before changing our stance.
BUY IDEAS
Carvana (CVNA) is still within the base it’s occupied since early May, but yesterday looks very enticing—not only did the stock surge on earnings (up 25%), but volume on the day was the second highest since the stock came public back in mid 2017. It’s a volatile name and could back and fill for a bit, but we’re OK nibbling here if you don’t own any, with the idea of buying more on the way up if the stock (and market!) move higher from here. A loose stop around 60 makes sense.
Homebuilders could get pushed/pulled by interest rates, but we remain very impressed with the action in Meritage Homes (MTH), which has held its huge earnings gap during the market’s wipeout and even found giant-volume support on Wednesday. If you want in, you can start small here with a loose stop around 56 or 57.
Also, more generally, we think you can take a look at some of the many earnings gappers from recent days—Guardant Health (GH), Insulet (PODD), Roku (ROKU) and SolarEdge (SEDG) all look like potential leaders for when the longer-term market advance resumes. All of them could easily dip (GH is taking a little hit this morning on some volume, for instance), but we’re OK starting small here or on weakness, but use a loose (15%-plus) loss limit on any of them if you enter given the market and each stock’s volatility.
SELL IDEAS
We have six outright sells
Disney (DIS)
Elastic (ESTC)
Proofpoint (PFPT)
Sarepta Therapeutics (SRPT)
Sunrun (RUN)
Zillow (Z)
SUGGESTED STOPS
Ally Financial (ALLY) near 30.5
Arrowhead Pharm (ARWR) near 26
ASML Inc. (ASML) near 209
Avalara (AVLR) near 78
Boston Beer (SAM) near 360
Chipotle Mexican Grill (CMG) near 675
Epam Systems (EPAM) near 177
Generac (GNRC) near 67
Guardant Health (GH) near 90
Heico (HEI) near 127
Insulet (PODD) near 121
Match.com (MTCH) near 74
Mirati Therapeutics (MRTX) near 91.5
Paycom Software (PAYC) near 221
Planet Fitness (PLNT) near 70
Sea Ltd. (SE) near 32
Shopify (SHOP) near 298
Tempur Sealy (TPX) near 74
Teradyne (TER) near 49
Trade Desk (TTD) near 232
Zscaler (ZS) near 74