Once again this week, the real action came under the surface—last week’s modest rotation out of growth stocks and into the broad market turned into a gusher on Tuesday and Wednesday morning, with high-relative performance stocks getting hit very hard while cyclical areas surged.
Since then, some of that move has reversed (growth up, cyclicals back down), but volatility remains elevated, with headlines regarding China sanctions and social media regulations coming every couple of hours.
As usual, when things get wild, it’s best to take a step back and refocus on the evidence. Right now, from a top-down perspective, things are improving—the market’s rotation has actually helped many indexes rally nicely during the past two weeks, which has kept the intermediate-term trend pointed up.
Moreover, this week one of our key blastoff indicators has turned green—on Wednesday, 90% of NYSE stocks closed above their respective 50-day lines, which, when it occurs after a market downturn, is rare and almost always bullish. Drawdowns on the S&P 500 tend to be limited from that point in time, while future returns (20% or more sometime over the next year) are solid.
To be clear, no indicator is perfect, and 2020 has been a rule-breaking sort of year, so there are no sure things. But there’s no question the 90% signal is a major arrow in the bulls’ quiver, at least when it comes to the major indexes and broad market.
But what about the high-relative performance stocks that have hit some potholes? On that front, the selling, while unpleasant, has been normal in most names thus far—stocks had had such massive runs that even 10% or 15% haircuts over a few days didn’t crack their uptrends, and encouragingly, most have bounced solidly since Wednesday morning.
We’re certainly not complacent, and we think it’s a decent bet that these growth stocks may need some time to consolidate. But to this point, the shakeout action isn’t unusual, and the odds favor the path of least resistance still being up—in fact, we continue to think many leaders can present good buying opportunities on these sorts of shakeouts.
Long story short, we remain optimistic, but we’re keeping our eyes peeled for a further change in the market’s character and are looking for solid entry points. We’re likely to keep our Market Monitor at a level 7 on Monday.
BUY CANDIDATES
Cloudflare (NET) remains very skittish on a day-to-day basis, but it’s actually closed tightly near 28 many times in recent weeks and hasn’t budged during the growth stock selloff. We’re OK starting a small-ish position here or on dips of a point with a stop near 25.
Fastly (FSLY), which has a somewhat similar business to NET, gapped up on earnings in early May and ran nicely higher before finally shaking out (falling from 46 last Friday to a low of 36 Wednesday morning). We think a dip of a point or two would be tempting, but if you enter, use a loose loss limit in the 33 to 34 area.
MercadoLibre (MELI) has been very well controlled during the recent hiccups in growth stocks, and while it’s still extended, there should be solid support in its gap area around 750. We’re OK buying some here with a stop in that area if you want in.
Seattle Genetics (SGEN) continues to pull in, and while it has suffered a couple of days of big-volume selling, the retreat looks orderly. We’re OK picking up shares around here with a stop in the upper 130s.
SUGGESTED SELLS
DraftKings (DKNG) has gone bananas on the upside, and given that this is a totally new story, it could go much farther if things go well. That said, it’s also extended in a big way (50-day line is down near 20!), so if you bought some, we’d consider shaving off a few shares up here.
As for outright sells, we have five today, though we could pile on a few more on Monday depending on how things go:
Advanced Micro Devices (AMD)
Alnylam (ALNY)
Atlassian (TEAM)
Barrick Gold (GOLD)—weakest of the precious metal stocks we have
Moderna (MRNA)
SUGGESTED STOPS
Acadia Pharmaceuticals (ACAD) near 47
Acceleron Pharma (XLRN) near 93
ASML (ASML) near 290
Ciena (CIEN) near 48
CrowdStrike (CRWD) near 67
Five9 (FIVN) near 90
Fortinet (FTNT) near 122
Freshpet (FRPT) near 71
Halozyme (HALO) near 22
MarketAxess (MKTX) near 450
MyoKardia (MYOK) near 96
Newmont (NEM) near 56.5
Nvidia (NVDA) near 305
Pelaton (PTON) near 37.5
Pinduoduo (PDD) near 54.5
Schrondinger (SDGR) near 56
Scotts Miracle Gro (SMG) near 129
Teladoc (TDOC) near 144
Zoom Video (ZM) near 144
Zscaler (ZS) near 74