The market had been doing a great job of shrugging off any negative news this month, but the coronavirus (and its likely effect on Chinese and global economic growth) has finally caused the bulls some discomfort. Even so, the big-cap indexes and most leading stocks have thus far acted resiliently—on the week, the S&P 500 and Nasdaq are down 1% or so.
That said, broader market measures aren’t looking as hot; in fact, small- and mid-cap indexes, as well as the NYSE Composite, are all below (some by just a bit) their 50-day lines as of this morning. By our measures, that means that the intermediate-term uptrend is now on the fence, and if today gets uglier, it could flip to a sell signal.
Longer-term, nothing has really changed with our view—whether you’re looking at the longer-term trend (up), longer-term studies (all point to higher prices down the road) or even the market’s recent history with global health issues (short-term iffy, but rarely long-term damage), this bull market has plenty of life left in it.
But, while we’re open to anything in the here and now, the odds favor some more reverberations as the market consolidates its huge October-to-January advance. How exactly that plays out is unknown (sharp pullback? Rotation? Choppy trading?), but there will probably be some more pain dished out.
Thus, we’re following the usual correction/pullback playbook—holding a little cash, trimming back any huge positions, tightening stops on losers/laggards, but holding our strong, resilient names and looking for new leaders, including those getting going on earnings.
In other words, we’re still bullish overall, but are trimming a bit and being choosier on the buy side. We’ll likely leave our Market Monitor at a level 6 come Monday.
BUY CANDIDATES
Breakouts aren’t great plays when the market is under pressure, but we like the liftoff in Dynatrace (DT) this week following a great earnings report. Recent IPOs are always tricky, but grabbing a few shares in the 30 to 31 area, with a stop around 27, seems like a decent risk-reward.
Software stocks have probably been the most resilient area of the market during the recent market selling. Splunk (SPLK) hasn’t been the strongest name of the group, but it’s made decent progress and, after a shakeout to its 10-week line, found support this week. You can start a position here with a very tight stop (percentage-wise) near 148.
SUGGESTED SELLS
First off, while you want to generally hold onto your winners, taking some off of names that are still extended isn’t a bad idea. Cardlytics (CDLX) is one example—the stock looks great, but it’s had a huge run and is very extended. Consider booking some partial profits while giving the rest plenty of room to consolidate.
As for outright sells, we have five today:
Apollo Global (APO)
Crocs (CROX)
Jabil (JBL)
Luckin Coffee (LK)
Novocure (NVCR)
And we’ve also tightened and added a bunch of stops below should the selling continue.
SUGGESTED STOPS
Aecom Technology (ACM) near 45.5
Alnylam Pharm (ALNY) near 112.5
Amedisys (AMED) near 168
Axsome Therapeutics (AXSM) near 79
Bilibili (BILI) near 20
Bristol Myers (BMY) near 62
Cirrus Logic (CRUS) near 77.5
Dexcom (DXCM) near 200
Dynatrace (DT) near 27
Eldorado Resorts (ERI) near 55.5
Fortinet (FTNT) near 107.5
Fortune Brands (FBHS) near 66
Garmin (GRMN) near 96.5
Generac (GNRC) near 99.5
Guess (GES) near 20
Insulet (PODD) near 175
IQIYI (IQ) near 21
Kansas City Southern (KSU) near 156
Lam Research (LRCX) near 285
Lululemon (LULU) near 228
Lumentum (LITE) near 74.5
Match.com (MTCH) near 78
RH (RH) near 206
Splunk (SPLK) near 148
Synaptics (SYNA) near 64
Taiwan Semi (TSM) near 53.5 (we lowered the stop a touch to align with the loss limit we had in this week’s issue—if you sold it at 55 (our prior stop), that’s fine, just let it be)
Western Digital (WDC) near 63