The market has gotten off to a fast start so far in 2018, with the big-cap indexes rising sharply (small-caps less so) and many individual stocks (including some of last year’s leaders that rested for the past five weeks) doing the same. That keeps the trends pointed up, so you should remain bullish.
Such a dramatic move in recent days has many wondering what’s up. Is this a blow off phase after a big advance, which will lead to a real market correction? Or is this strength a reflection of the unique corporate rate cuts that just went into effect, which should lead to higher prices down the road?
We offer no concrete predictions, and really, it’s best to just deal with the facts on the ground. In the near-term, there’s no question that the major indexes and many individual stocks are extended to the upside—the Nasdaq, for instance, is more than 200 points above even its short-term 25-day moving average.
With this week’s surge, the major indexes are now sticking straight up in the air—the Nasdaq, for instance, is more than 200 points above its short-term 25-day moving average. And numerous sentiment measures are in nosebleed territory, telling you that investors are giddy.
As we’ve repeatedly written, these sorts of indicators are imprecise; sentiment has been elevated for weeks now! But they do tell you to be selective on the buy side, and to not be afraid to book some partial profits as stocks push ahead.
Longer-term, though, there are many signs pointing toward this bull market having room to run. This week looks like it could produce a Buy signal from our 7.5% Rule (the S&P 500 closes a week 7.5% above its 35-week moving average for the first time in at least nine months), which generally portends a solid run over the next six to 12 months. That goes along with some unique “overbought” figures the market produced in December that generally lead to higher prices in the months ahead.
All of this is a long way of saying that (a) we’re in a bull market, but (b) there are signs that stocks are a bit overheated right now. For new buying, stick with stocks that have shown excellent buying volume and are fresher in their uptrends (like most of those featured in Top Ten recently). And on the sell side, don’t forget to bump up your trailing stops and take partial profits when a stock accelerates higher.
BUY IDEAS
DXC Technology (DXC 99) isn’t the fastest mover, but after peaking in November with most growth stocks, it found support at its 50-day line twice in December and has ratcheted to new highs on solid volume this week. You can buy some here or on dips of a point or so, with a stop near 92.5.
Grubhub (GRUB 72) blasted off in late October on earnings, and advanced smoothly through mid-December. Now it’s pulled back to its 25-day line, and a deeper pullback (maybe to the 50-day line at 67) is possible. Still, as the first dip/consolidation since getting going, the odds favor it being buyable. You can pick up shares here or (preferably) on dips of a point or two, with a stop in the 64 to 65 area.
After a couple of false starts, Lear (LEA 190) has decisively broken out on the upside on solid volume. It’s not the sexiest story, but auto-related stocks are doing well and LEA is participating in that move. You can buy some here or on dips to 187, with a stop in the mid-170s.
Neurocrine Biosciences (NBIX 80) gapped up in November, based out for two months and has pushed to new highs in recent days on solid volume. It’s a volatile biotech stock, of course, so you should keep positions on the small side. But we’re OK buying on the current two-day dip, with a stop around 72.
Splunk (SPLK 88) gapped up on earnings in November, consolidated for the next few weeks and then burst to new highs on good volume this week. We think it’s a relatively new leader in the tech space. It’s a bit extended here, so try to buy on dips of a couple of points, with a stop in the upper 70s.
SELL IDEAS
On the partial profit side, we think it’s a good idea to let go of a few shares of some stocks that have kited higher in recent weeks, including any of the refiners like PBF Energy (PBF 37) and Valero (VLO 94), or a coal stock like Peabody Energy (BTU 40)—anything that’s been moving higher for many weeks without much of a pullback could be a candidate.
We have no outright sells today, but we have tightened a bunch of stops (sometimes by a lot), especially for stocks that haven’t participated much during the recent push higher.
SUGGESTED STOPS
AbbVie (ABBV 100) near 93
Abiomed (ABMD 201) near 185
Alnylam (ALNY 129) near 122
Boise Cascade (BCC 40) near 37.5
Caterpillar (CAT 160) near 144
CBOE Holdings (CBOE 126) near 117.5
CF industries (CF 44) near 38.5
Conn’s (CONN 35) near 31.5
Cree (CREE 39) near 35.5
Dana Inc. (DAN 34) near 31
DXC Technology (DXC 99) near 92.5
E*Trade (ETFC 51) near 47
Flir Systems (FLIR 48) near 46
Global Blood Therapeutics (GBT 42) near 38
ICU Medical (ICUI 221) near 206
Insulet (PODD 68) near 64
Lear Corp. (LEA 190) near 176
Match Group (MTCH 32) near 29
Neurocrine Biosciences (NBIX 80) near 72
PBF Energy (PBF 36) near 32
Polaris (PII 125) near 121
Planet Fitness (PLNT 33) near 31
Red Hat (RHT 124) near 120
Roku (ROKU 47) near 42
SolarEdge (SEDG 38) near 35
Spirit Aerosystems (SPR 89) near 82
ST Microelectronics (STM 23) near 22
Teledyne Technologies (TDY 187) near 177
Trex (TREX 111) near 107
Tyson Foods (TSN 81) near 77.5
Universal Display (OLED 179) near 155
Wingstop (WING 40) near 37.5
Winnebago (WGO 55) near 51
YY Inc. (YY 125) near 107
Zendesk (ZEN 35) near 33