After a huge run to start the year, the sellers have finally put up a fight, pushing the major indexes down about 2% to 2.5% on the week. Individual stocks have also had a tough week, though it varies based on reaction to earnings.
The supposed reason for the decline is higher interest rates, and we can buy that; the yield on long-term Treasuries has backed up in a hurry in recent days. But we also think it’s best to just take the market as it comes—the what is more important than the why.
The question now, of course, is what comes next. Here are our thoughts.
First and foremost, it’s still a bull market. Yes, that’s obvious, but it’s something to keep in mind during down weeks or tough earnings seasons. The odds still strongly favor higher prices in the months down the road.
Second, even in the intermediate-term, the trend is strongly up—as we write this (Friday morning), the big-cap indexes are all still above even their 25-day moving averages. Small- and mid-caps are a bit weaker, but still nicely above their 50-day lines.
Third, though, you shouldn’t ignore the recent action, and we’re not just talking about this week’s selloff. We saw a huge spike in January, which produced a ton of very elevated sentiment readings (put-call ratios, advisor bullishness, money flows, etc.). And this run came after a very good year!
Combine those things and (a) we don’t believe you should get defensive here, throwing out your winners or selling en masse, but (b) you should tighten stops (on losers especially, but also with some modest winners) and continue to be choosy on the buy side.
One other observation is that, after a massive sentiment extreme like we saw, the market usually needs time to consolidate—it takes time for investors to get worried and for some stocks to build new bases. That doesn’t mean the market and every stock has to go down for weeks, but it’s fair to expect a choppier environment, at least among individual stocks.
We remain bullish overall, and you shouldn’t overreact to an overdue pullback; the major indexes are still in uptrends, and many stocks look fine. That said, given the action, you shouldn’t be complacent, either. Dump anything that cracks, tighten some stops and look for lower-risk entry points.
BUY IDEAS
Abercrombie & Fitch (ANF 21) popped to new highs on good volume in mid-January, continuing the strong uptrend that began in mid-November. It’s pulled back on tame volume during the past couple of weeks, standing on top of support (and its 25-day line). We think it’s buyable here, with a stop around 18.5 (just below the 50-day line).
DXC Technology (DXC 100) isn’t usually a big mover, but it’s been riding its 50-day line higher nicely for months. It’s dipped back toward that line this week—we’re OK taking a position here with a stop near 96.5. That said, earnings are due out February 8, so keep any new position on the small side this close to earnings.
Gardner Denver (GDI 34) has also pulled back to its 50-day line, which it’s held since getting going in September. With this one, you might consider buying above 35.5 or so, waiting for a sign of buying, with a stop near 32.5. Earnings are out February 15, so a smaller-than-normal position makes sense.
NetApp (NTAP 61) enjoyed a nice-volume advance in the first part of January and has since drifted lower in a controlled manner, kissing its 25-day line today. We’re OK buying a little here (earnings are due out February 14) with a stop near 57.
Commodity stocks have taken a hit, but most aren’t broken—Steel Dynamics (STLD 44) just broke out in December, had a persistent advance through most of January and has now been yanked down toward its 50-day line. We’re OK buying some here with a stop near 42.
SELL IDEAS
As expected, we have a few sells this week due to stops being hit and other lackluster action. Alcoa (AA 50), Beacon Roofing (BECN 61), C.H.Robinson (CHRW 92), Conn’s (CONN 31), Lennar (LEN 61), Polaris (PII 111), ProPetro (PUMP 18), Pulte Group (PHM 31), Tyson Foods (TSN 75) and USG Corp. (USG 36) are sells.
And we continue to tighten our existing stops, and have added a few new ones today.
SUGGESTED STOPS
AbbVie (ABBV 118) near 105
Abiomed (ABMD 251) near 220
Adamas (ADMS 37) near 34.5
Ally Financial (ALLY 29) near 28.5
American Woodmark (AMWD 134) near 125
Arch Coal (ARCH 90) near 88
Boise Cascade (BCC 43) near 41
Burlington Stores (BURL 118) near 116
Caterpillar (CAT 159) near 154
CBOE Holdings (CBOE 136) near 126
Dana Inc. (DAN 32) near 31.5
DXC Technology (DXC 100) near 96.5
E*Trade (ETFC 54) near 49.5
First Solar (FSLR 67) near 66
Flir Systems (FLIR 51) near 48.5
Floor & Décor (FND 47) near 44.5
Freeport McMoRan (FCX 19) near 17.5
Gardner Denver (GDI 34) near 32.5
Global Blood Therapeutics (GBT 60) near 48
ICU Medical (ICUI 228) near 216
Insulet (PODD 76) near 70
Lear Corp. (LEA 190) near 182
Match Group (MTCH 35) near 30.5
Neurocrine Biosciences (NBIX 85) near 76
Nucor (NUE 65) near 64
Planet Fitness (PLNT 34) near 31.9
Red Hat (RHT 129) near 123
Spirit Aerosystems (SPR 98) near 92
Teledyne Technologies (TDY 192) near 184
Twitter (TWTR 26) near 23.5
Urban Outfitters (URBN 33) near 32
Valero (VLO 94) near 90
Wingstop (WING 47) near 42.5
YY Inc. (YY 130) near 118
Zendesk (ZEN 38) near 35.5