The market quieted down considerably this week—while there were still some sharp daily swings, they were much less than the past four or five weeks. As we write this morning, the S&P 500 and Nasdaq are down less than 1% since last Friday, which again isn’t much of a change compared to recent times.
Our overall view hasn’t changed: With the intermediate-term trend still clearly down, we continue to advise a defensive stance. For the record, for our models to flash a green light, most indexes we track would have to rise above the level they were five weeks prior. Never say never, but such a signal is still likely to take some time.
That’s especially true given that the market’s bounce to this point hasn’t been overly impressive. At their highs earlier this week, the S&P 500 and Nasdaq had recouped only 35% to 40% of their crash declines; that can always change, of course, but the stronger the bounce, the greater the odds that we’ve seen a more meaningful bottom.
Don’t get us wrong, though—we do see some encouraging signs out there, including the aforementioned drop in volatility (the market being able to shrug off bad news of late is a plus), the relatively tame number of new lows even on bad days (got up to 250 combined on the NYSE and Nasdaq yesterday, far fewer than the 1,600 on March 23 and 4,400 on March 12), the increasingly pessimistic sentiment (both from indicators and anecdotally) and the many growth stocks that appear to be in the mid-stages of building launching pads.
Thus, if you have plenty of cash on the sideline, we’re still OK putting a little of that to work here and there. Just keep positions on the small side and expect lots of volatility and rotation, even when the indexes are up. (One of the big differences in the action between an uptrend and a downtrend in the market is that, in a downtrend, stocks that approach new high ground are usually sold off fairly quickly. It’s obviously the opposite in uptrends, where strong stocks get stronger.)
Outside of a couple of small buys, though, the main goal right now remains preserving capital (holding lots of cash), staying patient and continuing to fine-tune a watch list as we wait for a sustained uptrend to get underway.
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:
Acceleron Pharma (XLRN): It’s speculative, but it recouped most of its crash losses and is hanging around its 50-day line.
Chewy (CHWY): Four-day pullback so far is sharp but not abnormal after the recent run.
Cloudflare (NET): Still perched above all moving averages and near its high
Dexcom (DXCM): Recouped about 80% of its recent decline and is north of its 50-day line.
eHealth (EHTH): Holding its huge rebound very well.
Inphi (IPHI): No giveback after its snapback from 56 to 80.
Masimo (MASI): Within a couple of points of all-time highs.
Moderna (MRNA): Could be emerging as the top vaccination “play.” New closing highs yesterday. Still speculative.
Regeneron Pharm (REGN): Two tests of the 10-week line were successful, new closing high yesterday.
Seattle Genetics (SGEN): If the market were healthy, SGEN would be ready to break out.
Teladoc (TDOC): Low-volume rally after big-volume selling isn’t ideal, but still, no complaints.
Vertex Pharm (VRTX): Three above-average volume buying days this week and the stock isn’t far off new highs.
ZTO Express (ZTO): Hard to have a ton of confidence in many Chinese names, but ZTO has closed below its 50-day line just once during this whole mess, and is now near new highs.
SUGGESTED SELLS
We don’t have any specific sells right now, but we’re keeping a close eye on stocks that aren’t really bouncing—GSX Techedu (GSX) is one example, as are Apple (AAPL) and Adobe (ADBE).
We’re also watching Zoom Video (ZM), which has obviously had a monstrous run but has now come under huge selling pressure. It’s not broken here, but we’d like to see the stock find support in the near future; if not, it might be starting a deeper retreat.
SUGGESTED STOPS
None for now, as we’re using a little judgment and 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.