After a straight-up run in many indexes and some great moves by individual stocks, the sellers have finally taken a stand, with the market and many stocks hitting air pockets during the past couple of days.
What do we think? First and foremost, the intermediate- and longer-term trends remain up for the indexes and the vast majority of stocks, so we continue to expect higher prices in the weeks and months ahead. And, while there has been damage (we have a few sells listed below), for many stocks, the action thus far looks like a “trend knockout,” i.e., a sharp decline that shakes out the weak hands after a big run.
In the shorter-term, we wouldn’t be surprised to see some sloppy action. We say that (a) because of the recent selling after the big run, (b) because we’re seeing some money flow into defensive sectors (utilities, consumer staples) and out of some risk-on sectors (especially materials) and (c) because earlier this week, the number of stocks hitting new highs on the Nasdaq reached its largest level since early December. That often precedes some short-term weakness.
So what should you do?
First, follow the plan. If a stock trips your stop or loss limit, cut it loose. And you should probably tighten stops for your losers, laggards and other so-so performers. (We’ve been doing that every week in our list of stops.) If a stock hasn’t gotten going during the past few weeks, it’s likely to be vulnerable during any market pullback.
Second, we advise giving most of your winners a chance to consolidate and resume their advance. Taking partial profits in a couple of your winners is fine (selling one-third of your shares and holding the rest), but we’d generally try to let your top performers move higher over time.
Third, on the buy side, be selective. Right now, we’d favor targeting stocks that have shown explosive volume on the upside in recent weeks and are now pulling back. We have some ideas below.
As for our Market Monitor, we’ll probably knock it down a notch or two to respect the recent selling, but we remain overall bullish.
BUY IDEAS
Financial stocks are still holding up relatively well, and Ally Financial (ALLY 23) looks like a decent buy on this dip following its monstrous-volume breakout and follow through. Buying below 23 with a stop at 21 looks like a high-odds trade.
Glaukos (GKOS 46) still has earnings coming out soon (next Wednesday), so buying it here is tricky. But we really like the breakout at the end of January, the two-week follow-through on the upside, and now a relatively modest dip. If you’re aggressive, you could nibble here, or just keep an eye on it next week—a positive earnings reaction could be buyable.
Olin Corp. (OLN 31) surged to new highs on excellent volume following earnings at the start of February, ran up a couple more points, and is now retreating normally. It looks buyable around here or on dips toward 30, with a stop in the 27.5 to 28 area.
Square (SQ 17) exploded to new all-time highs yesterday after earnings, leaping not just out of a six-week trading range, but also above its post-IPO high many months ago. Volume was outstanding on the move, and the stock held most of its gains despite the sour market. It’s sure to be volatile, but we’re OK with a nibble here or on dips of a few dimes, with a stop near 15.3.
Univar (UNVR 32) reported a much-better-than-expected quarter this week, helping the stock to pop to new highs on two straight days of excellent volume. (We’d also note that analysts see great groUnivar (UNVR 32)wth here, with earnings up 28% both this year and next.) If you’re game, you could buy some around here with a stop near 28.5.
SELL IDEAS
We have seven sells this week, most of which tripped their stops or loss limits, though we’re dumping a couple just because they have been lagging and we think there will be better places for our money going forward.
Allegheny Technologies (ATI 19), CF Industries (CF 31), Eagle Materials (EXP 102), Greenbrier (GBX 43), HD Supply (HDS 42), Nvidia (NVDA 100) and U.S. Silica (SLCA 52) are all sells this week.
Also, if you own Incyte Corp. (INCY 130), you could consider taking some off the table on today’s pop, and then holding the rest for, hopefully, a larger longer-term move.
Plus, we’ve updated and added to our list of stops below.
SUGGESTED STOPS
Adient (ADNT 66) near 61
Alaska Air (ALK 96) near 91
Applied Materials (AMAT 36) near 34
Cavium (CAVM 65) near 63.5
Century Aluminum (CENX 14) near 12.9
Charles Schwab (SCHW 41) near 38.5
Cheniere Energy (LNG 47) near 45
Citizens Financial (CFG 37) near 34.5
Cliffs Natural Resources (CLF 11) near 10
Clovis Oncology (CLVS 59) near 53
Dave & Buster’s (PLAY 55) near 53.5
Deere (DE 108) near 104
DeVry (DV 32) near 31.5
Essent Group (ESNT 34) near 33.5
Grand Canyon Education (LOPE 61) near 58
Hancock Holding (HBHC 47) near 44
Incyte Corp. (INCY 130) near 113
KLX Inc. (KLXI 50) near 47.5
Micron Technology (MU 23) near 22.4
Quanta Services (PWR 37) near 35
SVB Financial (SIVB 188) near 170
Square (SQ 17) near 15.3
Take-Two Interactive (TTWO 58) near 54.5
Tesaro (TSRO 185) near 162
Texas Capital Bancshares (TCBI 89) near 79
Thor Industries (THO 110) near 103
Univar (UNVR 32) near 28.5
U.S. Steel (X 38) near 35
Weibo (WB 51) near 48.5
Western Alliance (WAL 52) near 49
Western Digital (WDC 74) near 72.5
XPO Logistics (XPO 50) near 44.5