From a top-down perspective, it’s hard to find a more cohesive, bullish environment than we’ve had during the past couple of weeks. All five of the major indexes we track—the S&P 500, S&P 400 and S&P 600 (large, mid and small caps), as well as the NYSE and Nasdaq Composites—have been hitting all-time highs in recent days. The same goes for hundreds of stocks from a variety of sectors.
Combine the clearly positive intermediate- and longer-term uptrends with some still-positive longer-term studies (our 7.5% Rule, which flashed in early March, remains in effect and hints at higher prices ahead) and it’s safe to say the odds favor higher prices in the weeks and (especially) months down the road.
We do think that the short-term has the potential to be tricky, partly because the market’s had a strong run recently, partly because we’re seeing a few signs of complacency (gone or forgotten are many of the fears of recent months) and partly because earnings season is now underway. Yesterday, in fact, saw some churning action in the market, and this morning saw some quick selling (and a few dents among leading stocks) after a gap up.
That said, we certainly can’t say investor sentiment is anywhere near giddy. Equity fund flows since the beginning of September have actually been negative $8.5 billion (according to Lipper), compared to $18.4 billion of inflows into taxable bond funds. Clearly, then, the average Joe isn’t piling into this rally yet—generally a good thing.
As for the broad market, we’re seeing general strength across the board, though we think it’s fair to say that growth stocks have become more selective (some have recently hit potholes), while “old world” names remain in firm uptrends. That’s more descriptive than predictive, but we’ll see if the gradual rotation into the broad market continues in the weeks ahead.
Anyway, details aside, it’s a bull market, and thus you should remain mostly bullish. Given the rally of the past couple of weeks, trying to sharp shoot some entries on pullbacks probably makes sense, but you should also be holding your strong performers and remaining heavily invested.
BUY IDEAS
DXC Technology (DXC 91) isn’t the fastest mover but it remains well under control, basing tightly in June and July, breaking out in August, then tightening up again for a few weeks, and lifting off recently. You can buy a little here or on dips of a point or two, with a stop near 84.
Guidewire Software (GWRE 79) is thinner and a bit choppy, but it had an outstanding volume clue in early September (due to an acquisition announcement), and has since built a tidy cup-shaped base. You could start a position here with a stop near 75, and possibly buying more on a push above 82.
Lots of “old world” stocks that enjoyed powerful, persistent uptrends in September to new highs have now rested for a couple of weeks and can be targeted on any further weakness. Lear Corp. (LEA 173) is a good example—the stock broke out at 152, surged in a straight line to 177 and has now grudgingly retreated to 173 during the past two weeks. You could buy a little here or, preferably, on dips toward 170. A stop near 160 makes sense.
Planet Fitness (PLNT 27) is in a clear uptrend, and has now basically marked time during the past three weeks as the 10-week line (near 25.5) has advanced. We’re game with a purchase here or near 26, with a tight stop around 25.
SolarEdge (SEDG 29) has set up another solid risk/reward situation. After forming a nice-looking base for a few weeks, the stock thrust to marginal new highs late last month, but has since gone straight sideways, which is usually constructive. You could buy a little here if you don’t own any, with a stop around 26.5.
SELL IDEAS
With so many stocks acting well, don’t forget to take a few chips off the table (partial profits) while things are good, which not only gives you some profit, but also allows you to give your remaining shares more room to breathe.
Examples of stocks you can take some off (maybe one-third of your shares) include Caterpillar (CAT 130), ON Semiconductor (ON 19), Red Hat (RHT 121) and Square (SQ 33).
As for outright sells, we’re going to ditch Lumber Liquidators (LL 35), which hasn’t been able to build on its gap up in August. The same goes for Wynn Resorts (WYNN 141), which has shown lots of distribution recently.
SUGGESTED STOPS
58.com (WUBA 67) near 60.5
Abiomed (ABMD 173) near 160
Alexion Pharmaceuticals (ALXN 141) near 138
Align Technology (ALGN 193) near 179
Arista Networks (ANET 191) near 176
Baidu (BIDU 263) near 229
Brinks (BCO 87) near 78
Catalent (CTLT 42) near 38.5
CBOE Holdings (CBOE 110) near 102
Celgene (CELG 136) near 134.5
E*Trade (ETFC 44) near 41.5
Exact Sciences (EXAS 47) near 40
Franco-Nevada (FNV 81) near 78
Guess (GES 16) near 15
IPG Photonics (IPGP 197) near 174
iRhythm Technologies (IRTC 53) near 47
Lear Corp. (LEA 173) near 160
LendingTree (TREE 245) near 227
Live Nation (LYV 42) near 40
Nintendo (NTDOY 49) near 44
Nvidia (NVDA 193) near 171
Planet Fitness (PLNT 27) near 25
Red Hat (RHT 121) near 107
Royal Gold (RGLD 88) near 85.5
RPC Inc. (RES 23) near 21.9
Salesforce.com (CRM 97) near 94
SolarEdge (SEDG 29) near 26
Spirit Aerosystems (SPR 80) near 73
Square (SQ 33) near 28
Stamps.com (STMP 223) near 203
Summit Materials (SUM 32) near 30
Take-Two Interactive (TTWO 104) near 95.5
Terex (TEX 46) near 41.5
Universal Display (OLED 134) near 119
Vertex Pharmaceuticals (VRTX 153) near 149
Winnebago (WGO 42) near 40