After a sharp selloff last week, the sellers really showed their muscle this week, driving the indexes sharply lower even after this morning’s solid bounce.
We know it’s tempting to spend time figuring out why the market is falling, and listening to predictions on what’s to come. But, as usual, it’s best to stick to the facts and formulate a plan based on that.
So what are the facts? First, the longer-term trend of the market is still up (most major indexes are above their longer-term moving averages), and the positive longer-term studies from December and January still hold weight. In other words, it’s still an overall bull market.
But right now, there’s no question the intermediate-term trend is pointed down and the broad market is unhealthy. In the very short-term (days) the market is probably getting close to a nice bounce; who knows, it may be starting today. And given the severity of the decline so far, the bounce could be pretty powerful.
That said, given that the market has had a huge run in recent months, it’s also likely that this correction needs more time (for sentiment to dampen and for big investors to reposition) before it finishes up. That doesn’t mean the indexes have to fall another X% over X months—we’re not in the prediction business. The point is that a straight-up advance from here to new highs is unlikely.
So how do you handle it? Except for a nibble here or there, we advise limiting new buying. If you want to buy something for a bounce or get into a stock near support, that’s fine, just have a plan of where you’d exit and keep your risk reasonable.
We also advise being vigilant with losses, including not letting decent profits turn into losses. That said, we wouldn’t advise wholesale selling—if you have some winners, try to give them some rope, though we’re not opposed to taking partial profits in stocks you have big profits in, especially those that have had big runs during the past many months.
All in all, while the moves have been extreme, it’s best to treat this as a “regular” intermediate-term correction—selling your weak stocks, holding most of your resilient stocks and, importantly, keeping your eyes open for leaders of the next upturn.
BUY IDEAS
We don’t advise much buying but there are actually quite a few good-looking charts out there.
Grubhub (GRUB 84) soared on earnings yesterday, and while it’s giving back some today (and could easily pull in further), its strength makes it one to keep on your watch list.
Shopify (SHOP 120) continues to act like its Q4 selloff and consolidation wore out most weak hands. It’s actually still holding around its 25-day line, though it’s whipping around with the market. Keep an eye on it, or if you nibble, use a loose stop near 112.
Sprouts Farmers Market (SFM 26) sold off last week but found good-volume support at its 50-day line on Tuesday and has held firm since. Another one to watch—if you buy, a stop around 24.5 is appropriate.
Splunk (SPLK 87) has taken a couple of body blows but is still holding up near its 50-day line. A small purchase here with a stop around 82 could work.
Twitter (TWTR 31) was another solid earnings winner this week, closing up 10% yesterday despite the horrible market. It’s hard to buy anything that’s extended in this environment, but if you do, use a loose stop near the bottom of the earnings gap around 27.
SELL IDEAS
As expected a ton of stocks have tripped their stops this week. If you want to give one or two some rope and see if you can sell on a bounce (or hold through some further weakness), that’s fine, but just be sure not to ignore a bunch of stops and end up in “hold and hope” mode.
Below are sells in today’s issue.
American Woodmark (AMWD 127)
Boise Cascade (BCC 41)
Canada Goose (GOOS 31)
CBOE Holdings (CBOE 104)
Corcept Therapeutics (CORT 15)
DXC Technology (DXC 94)
E*Trade (ETFC 49)
Flir Systems (FLIR 46)
Freeport McMoRan (FCX 17)
Gardner Denver (GDI 31)
ICU Medical (ICUI 214)
Lear Corp. (LEA 183)
Matador Resources (MTDR 28)
ON Semiconductor (ON 21)
Penn National Gaming (PENN 27)
Planet Fitness (PLNT 30)
Stifel Financial (SF 59)
Teledyne Technologies (TDY 175)
Urban Outfitters (URBN 34)
Valero (VLO 87)
Varian Medical (VAR 114)
YY Inc. (YY 115)
We’ve also added and updated a bunch of new stops below—don’t hesitate to email me directly (mike@cabotwealth.com) with any questions or comments on these or any Top Ten stock!
SUGGESTED STOPS
AbbVie (ABBV 108) near 105
Abercrombie & Fitch (ANF 20) near 18.5
Abiomed (ABMD 225) near 220
Adamas (ADMS 31) near 34.5
ASML Holdings (ASML 179) near 179
Charles Schwab (SCHW 49) near 48.5
Commercial Metals (CMC 22) near 21.5
Continental Resources (CLR 48) near 48
Dycom (DY 109) near 108
G-III Apparel (GIII 34) near 33.5
Global Blood Therapeutics (GBT 56) near 49
Helmerich & Payne (HP 63) near 62
Insulet (PODD 72) near 70.5
Kohl’s (KSS 60) near 57.5
Ligand Pharmaceuticals (LGND 146) near 145
Match Group (MTCH 35) near 31
Michael Kors (KORS 58) near 55.5
NetApp (NTAP 56) near 54
Neurocrine Biosciences (NBIX 77) near 76
Old Dominion (ODFL 131) near 127
Peabody Energy (BTU 38) near 36.5
Red Hat (RHT 125) near 123
Red Rock Resorts (RRR 31) near 30
Sage Therapeutics (SAGE 157) near 149
Steel Dynamics (STLD 43) near 41.5
Teck Resources (TECK 27) near 25.5
Twitter (TWTR 32) near 27
Weibo (WB 114) near 110
Westlake Chemical (WLK 100) near 96
Wingstop (WING 45) near 42.5
Zendesk (ZEN 39) near 36