For the first time since the market kicked off after the November elections, we’re seeing price/volume action that tells us the sellers are stepping up. This action isn’t a death knell, but it’s worth watching to see if the post-election uptrend is beginning to crack.
The biggest yellow flag is degradation in the broad market. The number of stocks hitting new lows on the NYSE has been climbing in recent days, the advance-decline line has taken a tumble in the same time period, and most small- and mid-cap indexes are lagging badly—the S&P 600 SmallCap, for instance, never really got going in February and hasn’t made any progress since early December.
Moreover, we’re seeing more stocks and sectors finally break down. Commodity-related areas have been the worst treated, but there’s no question there’s been an increase in sloppy action. Indeed, just over half of stocks listed on the Nasdaq are now below their 50-day lines.
As we said above, though, it’s too early to say the market is about to keel over or that you should do some wholesale portfolio selling. Most importantly, the intermediate-term trend remains up by our measures—while small- and mid-cap issues are struggling, indexes like the S&P 500, Nasdaq and NYSE Composite are still clearly above their 50-day lines and, with this morning’s likely move higher, not far from all-time highs.
Most of the market’s best performers still haven’t shown much in the way of abnormal action, and we’re starting to see money flow into new areas like homebuilders and some medical and biotech.
All told, we still think it’s best to keep an optimistic frame of mind. Sustained uptrends often have some rough spots along the way, so what we’re seeing lately, while not ideal, isn’t horribly abnormal. Plus, we stand by what we wrote in Monday’s issue: There remain plenty of opportunities out there.
Still, it’s fair to say the evidence has worsened, so we’ll likely push our Market Monitor down a notch or two on Monday, depending on how things look then. On the buy side, it’s best to be selective and on the sell side, now’s definitely a time to tighten stops on losers and laggards, and taking a few chips off the table with some of your winners that have been running for a while makes sense, too.
BUY IDEAS
It’s encouraging to see many chip stocks continue to act well despite the market’s sluggishness.
Broadcom (AVGO 222) remains in a firm uptrend following its breakout in mid-January, and following earnings last week. It’s a bit extended here, but this is the kind of institutional stock that’s only recently gotten going that could persist if the market holds itself together. Dips to 218 or below would be tempting, with a stop near 203.
Cavium (CAVM 70) is another chip name that’s acting well—it’s showing signs of breaking out from a tight, three-month area, with some big-volume buying on Wednesday. We think taking a small position here with a stop near the 50-day line (around 65.5) could work well.
And then there’s Skyworks (SWKS 97), which has refused to give up any ground since its earnings-induced breakout in January. Recently, SWKS has held support at its 25-day line and shown some excellent positive volume clues. We’re OK buying here or (preferably) on dips of a couple of points, with a stop around 88.
Outside of chip stocks, Dave & Buster’s (PLAY 59) has etched a tight three-month consolidation, and showed bullish price/volume action yesterday. The firm will likely report earnings within a couple of weeks, which is a risk, but we like the setup. You could nibble here or on a breakout above 60, using a stop in the mid-50s.
Lastly, we’re highlighting Paycom Software (PAYC 56), which gapped up on earnings nearly four weeks ago and has glided to new price highs since. It’s not a perfect chart, but we like the upside follow through, and our guess is that the next pullback will likely be buyable—a dip to the 53 to 54 area could be bought, with a stop just below 50.
SELL IDEAS
On the sell side, we have six we’re kicking off our list today, most of which because they tripped their stops this week. Box Inc. (BOX 17), Century Aluminum (CENX 12), Cheniere Energy (LNG 45), KLX Inc. (KLXI 46), Thor Industries (THO 99) and Yandex (YNDX 23) are all sells.
SUGGESTED STOPS
Adient (ADNT 70) near 63
Alaska Air (ALK 95) near 92
Alcoa (AA 35) near 33.5
Ally Financial (ALLY 22) near 21
ASML Holding (ASML 121) near 118.5
Applied Materials (AMAT 37) near 35
Cavium (CAVM 70) near 65.5
Charles Schwab (SCHW 42) near 39
Citizens Financial (CFG 38) near 35
Clovis Oncology (CLVS 60) near 55
Dave & Buster’s (PLAY 59) near 54.5
Deere (DE 110) near 105
DeVry (DV 33) near 31.9
Essent Group (ESNT 35) near 34
Glaukos (GKOS 46) near 42
Grand Canyon Education (LOPE 66) near 60
Hancock Holding (HBHC 46) near 44.5
Incyte Corp. (INCY 138) near 121
Lumentum (LITE 46) near 43
Marriott Vacations (VAC 91) near 87
Micron Technology (MU 25) near 23.2
ON Semiconductor (ON 15) near 14.2
Quanta Services (PWR 37) near 35.5
Sanmina (SANM 39) near 37.5
SVB Financial (SIVB 194) near 177
Square (SQ 17) near 15.5
Take-Two Interactive (TTWO 59) near 55
Tesaro (TSRO 173) near 162
Texas Capital Bancshares (TCBI 87) near 79.5
TTM Technologies (TTMI 16) near 15.5
Univar (UNVR 31) near 29.5
U.S. Steel (X 36) near 35
Western Alliance (WAL 52) near 49.5
Western Digital (WDC 74) near 72.5
XPO Logistics (XPO 49) near 45.5