The market has been all over the place this week, but net-net, the indexes are posting modest gains. As we write, the S&P 500 and Nasdaq are both up about 1% on the week. It’s a similar story for individual stocks—most leading stocks hit near-term lows last Thursday and have bounced decently (not amazingly) since.
In the near-term, it’s good to see some secondary measures begin to reach intriguing levels. Our own Real Money Index, which tracks the sum of money flows to all equity mutual funds and ETFs over a five-week span, just hit a relatively extreme level. It’s not a generational buy signal, but it does tend to lead to above-average Nasdaq performance during the next month or two.
Combined with some other measures (a dearth of new highs, etc.), there’s evidence that we could be approaching washed out levels and, if all goes well, the market could start to build a bottom.
Intermediate-term, though, the trend for all of the indexes and most stocks remains down, and frankly, the bounce to this point has been uninspiring—the S&P and Nasdaq have recouped around half of their declines at best, while the small- and mid-cap indexes are far worse than that. Given all of that, it’s best to stick with a defensive stance. Our Market Monitor will likely remain at a level 4 (out of 10) in Monday’s issue.
Going forward, we know everyone would like to know when a rally will come, but that’s not how it works—it’s best to simply follow along with the action and stay in gear with the trend. Right now, your best move is to keep most of your portfolio in cash and patiently wait for the next upturn to get underway.
And what would cause us to say a new uptrend has begun? For our intermediate-term model, we need to see most major indexes get above their 25-day moving average and for that moving average to itself begin to advance—basically, the index would have to be higher than it was 25 trading days ago, which, frankly, isn’t something that’s just around the corner. We also want to see plenty of capable leadership setting up—if the rally is all utilities and consumer staples, it wouldn’t be the best sign.
We do, however, think that earnings season will likely begin separating the tennis balls from the eggs—i.e., those names that bounce back and hold their gains, vs. those that can’t get off their knees after the recent plunge. As always, we’ll be highlighting stocks that are showing relative strength.
As for trading some of these wild swings, we’re not against that—it’s fine if you want to try to make a few bucks playing the volatility in individual stocks. Just remember that the big money is in the big swing—owning a leading stock early in a new uptrend and riding it for a while. Thus, whether you dabble or not, keep your eyes on the bigger goal.
BUY IDEAS
We remain impressed with American Outdoor Brands (AOBC 14), which staged a giant gap up in late August, ran to 16 and has since pulled back to 14 or so, holding its 50-day line and its earnings gap. You could nibble here with a stop near 13, or look for a push above 15 (with a tighter stop near 13.5).
Ciena (CIEN 31) gapped out of a huge base on earnings in late August, pulled back to just below its 50-day line this month and has now snapped nearly all the way back to its highs near 32. Given the environment, we’d half-expect some weakness from here (anything near new highs usually attracts sellers in a downtrend), but taking a stab at it near 30.5, with a stop around 28.5, is one idea.
Intelsat (I 35) is showing highly unusual strength. The stock broke out in late September, and only pulled back modestly for a few days earlier this month before ripping to new highs this week! Again, strong stocks tend to attract sellers in a tough environment, but nibbling on dips of 34 or below, with a loose stop near 28, would be tempting.
Spirit Airlines (SAVE 50) enjoyed a persistent advance from 35 to 49, pulled back with the market to 43, and has now boomed to new highs above 51 (before a modest dip late this week) on excellent volume. We’re fine grabbing some shares here or on dips, with a stop near 46.
SELL IDEAS
We saw three stocks hit lower lows and trip support and their stops. Some of these names could eventually get going again if they react well to earnings, but at this time, it’s better to be safe than sorry. Our sells are:
Allison Transmission (ALSN 47)
Exact Sciences (EXAS 63)
Ligand Pharm (LGND 198)
SUGGESTED STOPS
Advanced Micro Devices (AMD 26) near 24
Allegheny Tech. (ATI 27) near 26.5
Ciena (CIEN 31) near 28.5
Clean Harbors (CLH 67) near 64
Dave & Buster’s (PLAY 59) near 57
EOG Resources (EOG 119) near 117
Grubhub (GRUB 118) near 108
HCA Healthcare (HCA 136) near 128
HealthEquity (HQY 88) near 82
Jacob’s Engineering (JEC 73) near 70.5
Match.com (MTCH 54) near 50
Nordstrom’s (JWN 60) near 58
Novocure (NVCR 45) near 41.5
Pacira Pharm. (PCRX 48) near 44
Spirit Airlines (SAVE 50) near 46
Trade Desk (TTD 125) near 116
Wingstop (WING 72) near 65.5
WPX Energy (WPX 18) near 17.5