When October 2018 goes into the history books, it will probably be described as a rolling crash—it started with glamour stocks, bled into the Nasdaq and quickly infected the rest of the market. And the selling continues, with the S&P 500 and Nasdaq both down by about 3.7% on the week as we write this, including today’s huge decline.
Taking a step back, our intermediate-term trend model has been negative for about three weeks now, which, combined with the action of individual stocks, had us bailing out of names left and right. And last week, our longer-term trend measure (called our Cabot Trend Lines, and written about in every issue of Cabot Growth Investor) turned negative for the first time since April 2016.
Remember, we’re trend followers, not trend predictors, so we’ll take it as it comes. That said, when looking back to 2000, about 60% of sell signals from the Cabot Trend Lines led to at least another leg down in the Nasdaq of 6% to 8% before a bottom is formed. (Some signals led to worse than that.) That seems to be what’s beginning here given this week’s action.
All in all, it’s been a tough month, but we’re glad to have turned cautious early on, moved to a defensive stance a week or two ago and remain defensive today. As we’ve written before, if you want to nibble or try to bottom fish, that’s fine, but keep it small and use reasonable stops.
As for when this could turn around, we’re not going to venture a guess—if you haven’t sold much, you should be paring back at least somewhat to respect what’s going on.
In the very (very, very) short-term, we’ll be interested to see if today’s decline results in a small positive divergence in the broad market—on the Nasdaq, for instance, 561 stocks hit new lows on Wednesday, whereas so far this morning, the number is “only” 380. That’s not definitive by any stretch, but we’re likely to see some letup in the downside momentum before the bulls put up a fight.
There are another dozen indicators that could be examined, but they all say the same thing: The market is trending down, many stocks and indexes are oversold, but there’s no letup in the selling yet. Thus, you should remain defensive and just take things on a day-to-day basis, preserving capital (and confidence) for the next sustained uptrend.
BUY IDEAS
We wouldn’t be buying it up here, but Amarin (AMRN 21) remains something to keep an eye on, with the stock actually advancing this week after its huge run. If you want in, look for a shakeout to 19 or so, using a loose stop near 16. (The stock is extremely volatile so a point or two move can happen quickly.)
We’d also keep an eye on Brazilian stocks, which are showing some intriguing relative strength after a massive downturn earlier this year. Petrobras (PBR 16) is holding firm despite the downturn in energy stocks, and Vale (VALE 15), while taking on water, is still above its 50-day line and near the high of its prior base.
Lastly, airlines have caught a bid—Spirit Airlines (SAVE 52) not only was strong enough to make Top Ten a couple of times since mid-September, but also gapped up on earnings this week and is holding most of those gains. If you want to nibble, we’re OK doing some near 51, with a stop around 47.5.
SELL IDEAS
The plunge this week caught up with many stocks that had been holding up well, tripping another batch of stops. As always, if you’re already heavily in cash, you could consider holding and trying to sell on a bounce, but we’ll just follow the system.
Advanced Micro Devices (AMD 18)
Allegheny Tech. (ATI 25)
Canopy Growth (CGC 40)
Clean Harbors (CLH 62)
Centennial Res. Development (CDEV 19)
Dave & Buster’s (PLAY 56)
EOG Resources (EOG 106)
Grubhub (GRUB 91)
HCA Healthcare (HCA 127)
HealthEquity (HQY 84)
Match.com (MTCH 48)
Mosaic (MOS 30)
Novocure (NVCR 32)
PBF Energy (PBF 40)
Trade Desk (TTD 110)
Wingstop (WING 67)
WPX Energy (WPX 16)
SUGGESTED STOPS
American Outdoor Brands (AOBC 14) near 13.4
Callaway Golf (ELY 22) near 21
Ciena (CIEN 30) near 28.5
Ecopetrol (EC 23) near 22
Ensco (ESV 7.3) near 6.9
Jacob’s Engineering (JEC 74) near 70.5
Nordstrom’s (JWN 61) near 58
Pacira Pharm. (PCRX 46) near 44
Rowan Co. (RDC 16) near 15.4
Spirit Airlines (SAVE 52) near 47.5