The indexes continued the slippage that began last week, lowlighted by Thursday’s plunge that brought most major indexes below key support. As of mid-morning, the S&P 500 and Nasdaq are down about 4% on the week.
From a top-down perspective, our biggest thought is that the intermediate-term trend is not up. You could argue that the trend with some indexes (the S&P 600 SmallCap and the Nasdaq) is sideways, some would say the trend is down (NYSE Composite, S&P 500) but none are in firm uptrends.
That alone is a good reason to pare back. Of course, we never got fully bullish during the February/early March rally. But keeping losers and laggards on tight leashes and keeping new buys smaller than normal makes sense until the environment changes.
On the positive side of things, the numerous growth-oriented stocks that showed persistent and powerful action in February (with many lifting from early-stage launching pads) continue to act relatively well. Sure, many have been dented this week, but most aren’t far from their highs!
Of course, in a weak market, good stocks can go bad in a hurry, so the resilience isn’t a reason to go out and buy a bunch of growth stocks today. But we’re still in favor of hanging onto your strong, profitable stocks, giving them a chance to hold up and (eventually) lead a new uptrend.
Back to the market, we’re ready for anything. Given that there’s a ton of bad news out there (trade war, interest rate hikes, investigations in Washington, D.C.), it wouldn’t surprise us if the major indexes are in a retest of the early-February low that will eventually prove successful. Indeed, most retests of an intermediate-term low occur six to eight weeks after the initial low, which jibes with today’s time frame.
On the other hand, after 15 months up (November 2016 through January 2018) without any corrections, it’s also possible the market simply needs more time to wear/scare out investors and digest its gains.
So which one is it? We don’t know, and it’s best not to guess. The job now is twofold. First, stay in sync with the market, which today means paring back, holding some cash and not trying to be a hero. But second, it means to keep your eyes peeled—when the market does get going, it looks like there will be plenty of leadership to sink our teeth into.
BUY IDEAS
Just a reminder—if you do buy on the current dip, we advise keeping positions small and making sure you keep a good chunk of cash on the sideline.
Pullbacks in the cloud software sector have been bought thus far, and that makes Coupa Software’s (COUP 47) dip to its 25-day line intriguing. The retreat comes after a persistent, big-volume run in February. You could nibble here if you don’t own any, with a stop in the 42 to 43 area.
Cybersecurity stocks also remain resilient. Fortinet (FTNT 53) is one of the leaders in the group and has begun to consolidate during the past two weeks. Dips toward the 25-day line (now at 52 and rising) would be tempting to nibble on, with a stop near 49.
GoDaddy (GDDY 61) gapped up on earnings in late February and got as high as 64.5 before an orderly pullback during the past two weeks. The stock found a bit of support this morning near its 25-day line—if you’re game, you can buy a little here with a stop near 57.
Lumentum (LITE 68) ripped to new highs after our recommendation in early March thanks to a well-received acquisition, and has since pulled back calmly on low volume as the stock digests its gains. Nibbling around here is OK with us, though a loose stop around 61 makes sense given the stock’s volatility.
Netflix (NFLX 308) is another growth stock that pulled back calmly (today could be the eighth day in a row of sub-par volume) to its 25-day line. A nibble here with a stop around 280 could work.
Zendesk (ZEN 48) has shown no inclination to pull back of late—there was some heavy selling volume last week, but the stock never touched its 25-day line and is currently three points above last week’s low, even as the market has gotten whacked. Another dip toward the 25-day line (now at 45.5 and rising) would be tempting, with a stop near the 50-day line at 42.
SELL IDEAS
On a positive note, you can sell MuleSoft (MULE 44) if you bought it—the company is being taken over by Salesforce.com. Shares spiked in response and can be sold.
On the downside, many stocks have tripped their stops. The following are all sells:
AbbVie (ABBV 100)
Arch Coal (ARCH 92)
LPL Financial (LPLA 61)
MercadoLibre (MELI 346)
Neurocrine Biosciences (NBIX 84)
Pure Storage (PSTG 20)
Steel Dynamics (STLD 43)
U.S. Steel (X 34)
Weibo (WB 124)
SUGGESTED STOPS
Abercrombie & Fitch (ANF 24) near 20.5
Abiomed (ABMD 286) near 255
Array Biopharma (ARRY 17) near 15.9
ASML Holdings (ASML 203) near 197
Charles Schwab (SCHW 53) near 52.5
Fortinet (FTNT 53) near 49
Harris (HRS 158) near 153
Insulet (PODD 85) near 76.5
Knight-Swift Transportation (KNX 48) near 47
Kohl’s (KSS 63) near 60
Ligand Pharmaceuticals (LGND 165) near 159
Match Group (MTCH 45) near 39
Michael Kors (KORS 62) near 60
Micron Technology (MU 56) near 52
New York Times (NYT 23) near 22.5
Old Dominion (ODFL 147) near 138
Ollie’s Bargain Outlet (OLLI 59) near 56
Sage Therapeutics (SAGE 161) near 157
Sangamo Therapeutics (SGMO 23) near 21.5
SVB Financial (SIVB 249) near 245
Twitter (TWTR 32) near 30
Westlake Chemical (WLK 114) near 108
Workday (WDAY 131) near 125
W.W. Grainger (GWW 279) near 260
Zendesk (ZEN 48) near 42.5