First off, for all those that celebrate, I hope you have a relaxing and comforting holiday weekend. Our offices are open today, though with the market closed and the kids at home, I’ll likely be logging off a bit early.
As for the market, it was definitely a constructive week, with both the S&P 500 and Nasdaq leaping more than 10% in just four days. At yesterday’s peak, both major indexes had recouped just about half of their crash declines. Small- and mid-cap indexes had an even better week, though neither has recouped as much of their declines as the big-cap indexes.
Despite the market finally rallying strongly, the intermediate-term trend hasn’t changed—by our measures, it’s still down, and it’s worth noting that all major indexes are still below their 50-day and 200-day moving averages. Plus, this week was one of rotation, as most resilient stocks actually backed off while money chased the beaten-down areas like financials and transports.
However, there’s no question the rally is a good thing, and we think next week will be key: If the major indexes can hold (or build on) their gains, an intermediate-term green light is possible. And if that happens, we’ll slowly begin to extend our line.
Moreover, if Monday is a decent day, we could receive an “early” blastoff signal—called a Whaley Breadth Thrust (after Wayne Whaley), it occurs when the advance-decline line on the NYSE explodes higher over a five-day period. Overall, it’s occurred 18 times since 1970, and during the following year, the market rallies as much as 27% on average. Not bad.
To be fair, some of these signals prove to be early, leading to some harrowing declines in the short/intermediate-term. Thus, it’s not as reliable as some other blastoff indicators we favor, but if it flashes, consider it an arrow in the bulls’ quiver.
All in all, to this point, the rally has been fairly “normal” in terms of a rebound in an overall downtrend. That’s why next week will be telling—if the buyers can continue to flex their muscles, and (importantly) if some more stocks break out to new highs, it would tell us this rally is abnormal (in a good way). If, however, the sellers reappear, it’ll obviously be a yellow flag.
We’ll be watching closely, but until the market proves itself on the upside, we’re sticking with a defensive stance.
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): Some overhead in the mid-90s to chew through, but not far off all-time highs.
Barrick Gold (GOLD): Big-volume leap to new highs on Thursday. Obviously, the group is a bit counter-cyclical, but you can’t argue with the action.
Bilibili (BILI): Briefly kissed new high ground yesterday before pulling back, but still in good shape overall. Sony just took a 5% stake.
Chewy (CHWY): Its reasonable post-earnings pullback led to this week’s romp to new highs on heavy volume.
Dexcom (DXCM): Actually consolidating in a reasonable range over the past eight trading sessions. Has recouped 80% of its crash decline.
Inphi (IPHI): It hit a little resistance late in the week, but the stock’s big-volume, straight-up action from its lows is right out of a textbook for tennis ball action.
Masimo (MASI): Tightening up near its highs.
Moderna (MRNA): Always a chance these “virus” stocks get hit if fears fade, but MRNA’s pullback this week was reasonable and on light volume.
Netflix (NFLX): Tightening up not far from its old highs. A powerful move above 390 would be encouraging.
Newmont Corp. (NEM): Similar to GOLD—massive-volume breakout
Okta (OKTA): Needs a better setup but a couple of good days could have it near new highs.
Regeneron (REGN): Low-volume move toward new highs; could easily pull back but no question it’s relatively strong.
Seattle Genetics (SGEN): Kissed new high ground this week before pulling back a bit. A few more days of chill action could provide a great setup.
Vertex Pharm (VRTX): Similar to SGEN—kissed new highs and then retreated normally.
ZTO Express (ZTO): Perched at new highs. Chinese stocks have been a relative minefield lately but ZTO (and BILI) are certainly the exceptions.
SUGGESTED SELLS
On the sell side, we’re going to prune the following three stocks, with possibly more in store depending on Monday’s action:
eHealth (EHTH): Pulling back a bit this week is one thing, but EHTH was rejected from the 145 area for the third time since mid-February and fell all the way to its 200-day line
TAL Education (TAL): The damage wasn’t as bad as initially feared, and if you want to hold with a stop near 48, that’s fine—but the big-volume drop this week makes the 56 to 60 area look like a tough nut to crack.
Adobe (ADBE): ADBE isn’t bad, so if you want to hold with a stop in the 280 range, you can. But it’s not showing any relative strength, which is what we’re homing in on now.
Lastly, we’re still holding Zoom (ZM), which did show some good-volume support near its 50-day line this week. But a meaningful break of this week’s low (near 109) wouldn’t be good.
SUGGESTED STOPS
Except for ZM, we don’t have any for now, as we’re using judgment and are focusing on building a watch list and only small nibbles. That said, if we do turn more positive on the market, and begin making some progress, we’ll start up this section again. Don’t hesitate to email me directly (mike@cabotwealth.com) for any questions on individual names.