Monday’s issue of Top Ten was titled “Downtrend or Shakeout?” but after yesterday’s follow-on, big-volume selling, it is certainly looking more like a market downtrend than a shakeout. By our measures, the intermediate-term trend is mostly pointed down at this point, and the broad market is very weak, with a couple hundred stocks hitting new lows each day while few hit new highs.
Because it’s clear the market’s evidence has worsened during the past couple of weeks, and with the intermediate-term uptrend in trouble, it’s time to turn more cautious by (a) cutting back on new buying, (b) selling your worst couple of stocks, (c) holding a good chunk of cash (maybe 30% to 40% depending on how you run your ship) and (d) consider selling a few shares of any winners you have that have been acting funky.
Depending on the action for the rest of today and tomorrow, we’ll probably be knocking our Market Monitor down another couple of notches on Monday.
Of course, we don’t want you to get completely bearish here, either. The long-term trend is still up and, while the small- and mid-cap indexes look terrible (both are currently around their 200-day moving averages!), the S&P 500 and Nasdaq are just 3% to 4% off their all-time highs.
Plus, we’re somewhat impressed with the number of stocks that are acting very well. Granted, few are actually going up, so not much money is being made. But many well-traded growth stocks are holding their own despite the repeated bouts of distribution in recent weeks. If and when the bulls retake control, there should be plenty of stocks to jump on.
But given the evidence, now’s not the time to be a hero. With the selling pressure intensifying, take a couple of steps back, set some stops and react to what the market shows us going forward. Should the indexes storm higher, we’ll do some buying, but if the selling pressures continue, we’ll grow more defensive.
BUY IDEAS
Keep in mind we’d keep any new positions small here, and you should mostly focus on building a watch list.
Alibaba (BABA 169) should be on everyone’s watch list—the stock reacted well to earnings this week and is still perched near its recent highs. If the market falls further, BABA probably will, too, but we’re not opposed to nibbling on dips of a few points and using a stop near 150.
ASML Holdings (ASML 152) continues to hang in there very nicely despite some sloppy action from its chip equipment peers. You could nibble here with a stop around 144 though we prefer just to watch it at this point.
Caterpillar (CAT 114) isn’t exciting, but it’s acting very well, moving straight sideways since its earnings gap in late July and finding support near its 25-day line today after releasing its monthly sales report. If you want in, use a stop around 109, or just watch it.
Facebook (FB 158) is another liquid leader that continues to act well, not giving up much ground since its big July advance. If you’re game, you could nibble here with a stop around 160, or just watch it.
Red Hat (RHT 101) fell to its 50-day line last week but then spiked back to new highs and has held firm during the past couple of days. You could buy a little here with a stop around 95, or just keep it on your watch list.
Many cloud software stocks have perked up this week, despite the market’s wobbles. Workday (WDAY 103) is one. The stock has been in a relatively tight range for two-plus months, and the firm reports earnings on August 30. It’s more of a Hold than a Buy here, but a stronger market and a gap higher on earnings (anything above 107.5 would be a breakout) would be intriguing. Big sales and earnings growth here.
SELL IDEAS
On the sell side, we have another batch of stocks that tripped their stops or otherwise broke intermediate-term support: Bob Evans (BOBE 66), Celgene (CELG 128), Dana Inc. (DAN 23), JD.com (JD 41), Netflix (NFLX 169), SiteOne Landscape (SITE 50), TD Ameritrade (AMTD 42) and Trade Desk (TTD 48) are all sells.
SUGGESTED STOPS
Aaron’s (AAN 43) near 41
Activision Blizzard (ATVI 62) near 59
Adobe Systems (ADBE 148) near 143
Ameriprise (AMP 139) near 137
Autohome (ATHM 65) near 51
Baidu (BIDU 220) near 210
Brinks (BCO 76) near 71.5
CBOE Holdings (CBOE 97) near 93
Citigroup (C 67) near 65.5
Cooper Co. (COO 246) near 238
CoStar Group (CSGP 279) near 267
E*Trade (ETFC 40) near 38.5
Exact Sciences (EXAS 38) near 35.5
Expedia (EXPE 145) near 141
First Solar (FSLR 48) near 44
Global Payments (GPN 94) near 92
IPG Photonics (IPGP 167) near 153
iRobot (IRBT 98) near 93.5
iRhythm Technologies (IRTC 44) near 41.5
LendingTree (TREE 226) near 196
Littelfuse (LFUS 177) near 175
New Relic (NEWR 46) near 43.5
Nintendo (NTDOY 41) near 39.5
NovoCure (NVCR 20) near 17
Nvidia (NVDA 164) near 153
Packaging Corp. (PKG 111) near 107
Planet Fitness (PLNT 24) near 23
Proofpoint (PFPT 88) near 83
Red Hat (RHT 101) near 95
Spirit Aerosystems (SPR 70) near 66
Square (SQ 25) near 23.5
Take-Two Interactive (TTWO 93) near 83
Terex (TEX 38) near 37
Universal Display (OLED 111) near 108
U.S. Concrete (USCR 77) near 74
Veeva Systems (VEEV 63) near 58
Vertex Pharmaceuticals (VRTX 149) near 140
Winnebago (WGO 34) near 33