As we mentioned a week ago, there’s no Top Ten issue this week, which is well enough since the decline of the past couple of weeks has left fewer and fewer stocks in good shape. Even so, we wanted to write up a quick (mostly market-based) review for you, with a regular (and more full-featured) update on Friday.
In terms of the overall picture, nothing has changed. Despite the shortened holiday week (which is usually bullish), the sellers did damage, with the S&P off 3.8% and the Nasdaq down a steeper 4.3% last week. Thus, the major trends of the market are still pointing down, and most stocks are a mess, so you should remain in a defensive stance.
That said, there are a couple of things to keep your eyes on going forward. The recent decline has seen the Nasdaq fully retest its October low, while other major indexes have come close. And on that test, there have been a couple of small positive divergences seen in the broad market—the number of stocks hitting new lows peaked around 400 last week, compared to 570 in October, for instance.
Moreover, whether you’re looking at indicators or subjective measures, there’s no doubt that sentiment has turned fairly negative, which is a good thing from a contrary point of view.
As we’ve written repeatedly, these secondary measures (divergences, sentiment) don’t always point out a market low point, but most market low points see these things occur. In other words, as opposed to a month ago, when sentiment was neutral and the market had only thrust lower for three weeks, the overall environment is now more conducive to some sort of bottom area being etched.
This morning’s bounce is obviously a good sign, but it’s just one day. What we’ll be looking for is for some further strength in the days ahead that could produce an intermediate-term green light. We’re talking about another 3% or so move from this morning’s levels in most major indexes—if that occurs by week’s end (or early next week), it’s possible we could turn more constructive.
It’s good to be aware of such a scenario so that, if it occurs, you’re ready to take some action. But there’s still a good distance between here and there, and as we’ve been preaching, it’s best to take things day-by-day given the extreme volatility out there. Right now, that means remaining patient, holding cash and keeping your watch list up to date in case the bulls make a stand.
As for individual stocks, if you want to take a stab at a couple in a small way, we’re OK with that given the potential that last week was at least a short-term washout. Just focus on stocks that have held up above their October lows and are showing some strength into this bounce. Some ideas include Dine Brands (DIN); Exact Sciences (EXAS), possibly above 72; Eli Lilly (LLY), Omnicell (OMCL); Ulta Beauty (ULTA); and Xilinx (XLNX), preferably on dips of a couple of points.
One final note: Until our next green light, we’re going to ease up on the stop recommendations for the simple reason that, right now, we’re doing a lot more watching than buying, so putting in stops below support will only serve to pare down our own watch list.
To be clear, we’ll still be advising whether something should be sold or not, and I’m always available (mike@cabotwealth.com) if you have any questions on a Top Ten stock you’ve bought. But given the market’s position and the recent volatility, we’ll be pretty liberal on our stops so we’re keeping our eyes on relatively strong performers when the market turns.
Since last Monday, stocks on our list that have shown abnormal weakness include CDNS, GLOG, I, JEC, VRSN and VALE—all should be sold, ideally on bounces if possible.
Again, don’t hesitate to email with any questions—and we’ll be back with you Friday for a “regular” Movers & Shakers update.