After a month-long crash phase that brought the S&P 500 and Nasdaq down 33% to 35% from their February highs, this week has finally brought a relief rally and a few pieces of encouraging news, with the major indexes rebounding north of 10% each and many other markets that were hit hard (such as junk and corporate bonds) doing the same.
When digging into the short-term details, there are some encouraging signs. First, as we’ve written before, the broad market actually began improving back on March 12; on that day, 4,400 stocks hit new lows on the NYSE and Nasdaq combined, but on this Monday (when the Dow was 3,000 points lower and the Nasdaq 600 points lower), just 1,600 stocks hit new lows. That’s a solid sign of resilience.
Then, on the first three days of the rally, we saw excellent breadth, which is another ray of light. Throw in lots of bearishness and it’s looking like there’s a good chance a workable low is in.
However, “workable low” doesn’t mean “bear market bottom.” The intermediate-term trend clearly remains down, and the fact is, it’s normal to get very short, sharp rallies in bear phases. Even if the market has found its ultimate low, the odds strongly favor lots of ups and downs and news-driven moves, both from the market and individual stocks, such as we’re seeing today.
All in all, the evidence has improved somewhat over the past week, based on the positive new-low divergence, the continued pessimism (bad news is the norm these days) and the initial breadth of the rally. Consider it a good first step.
But it’s still best to be positioned defensively given that the trends are down and most stocks are rallying into overhead resistance. As we’ve been writing, if you want to roll the dice on a name or two, there’s nothing wrong with that assuming you’re holding a ton of cash; we still think this near-term rally could go on for a bit. But you should mostly remain patient as we wait for a sustained uptrend to get underway—something that’s likely to take time to set up.
BUY CANDIDATES
As we did last week, we’re not going to advise specific buys, but here are some that are showing relative strength and/or resilient patterns:
Dexcom (DXCM): Held its 200-day line and bounced all the way back to its 50-day line
DocuSign (DOCU): Holding near its 50-day line
Domino’s Pizza (DPZ): Miles above its recent low and north of its 50-day line
eHealth (EHTH): Came within a few percent of new highs yesterday!
GDS Holdings (GDS): Just south of 50-day line and well above its recent low
GSX Techedu (GSX): Still one of the only stocks positioned for a legitimate breakout if the market gets going
Inphi (IPHI): Its snapback this week was terrific
Masimo (MASI): Four straight days of above-average buying volume; just a few percent from new high ground
Seattle Genetics (SGEN): Not just a nice bounce back above its 50-day line, but a nice base being built since Thanksgiving
TAL Education (TAL): Near its 50-day line; Chinese education continues to be a port in the storm
Teladoc (TDOC): Still north of all moving averages, but showed some climax-y signs earlier this week
Zoom Video (ZM): Probably needs to cool off but still acting fine
ZTO Express (ZTO): Has barely dipped below its 50-day line at all during this correction
SUGGESTED SELLS
Right now we have two sells, though if you want to give them a little rope that’s fine.
ServiceNow (NOW) isn’t awful, but there are many cloud software stocks that have bounced much more powerfully, so we’d rather focus on those.
FTI Consulting (FCN): After being resilient for the early phase of the crash, the sellers have pounced and the stock is fading of late.
SUGGESTED STOPS
None for now, as we’re using a little judgment as we’re focusing more on building a watch list and only small nibbles, rather than more aggressive investment. But don’t hesitate to email me directly (mike@cabotwealth.com) for any questions on individual names.