Last week we wrote about some encouraging signs from the market, and to start on a positive note, some of those things still hold true—the 80% up-volume cluster on the NYSE (three of four days off the early-December low) seems to be helping indexes like the S&P 500 and NYSE Compositive, both of which remain miles above their prior lows. The same goes with some cyclical areas (financials, transports, industrials, housing)—they’re obviously not plowing ahead, but they’re mostly chopping around.
However, when it comes to the rest of the evidence, it’s not looking good. First off, the market’s intermediate-term trend as a whole remains down, with most indexes below their 50-day lines, and some (small- and mid-caps) testing their lows and growth-oriented indexes and funds getting trashed. Moreover, many secondary measures are still flashing yellow—hundreds of stocks are hitting new lows nearly every day (a sign of an unhealthy broad market), while money is pouring into defensive areas (XLP, XLU, XLV, etc.)—again, not a healthy sign.
And, of course, there’s the action of growth stocks, which continue to melt down. Indeed, for many big winners (especially those that initially got going early 2020), it’s been a mini-crash of sorts, with 35% to 50% declines not unusual to see over the past six weeks.
When volatility picks up, so do predictions, whether it’s calls for a huge decline from here or a near-term bottom and Santa Claus rally. As usual, we’ll leave the predictions to others, but the bottom line is that the sellers are in control of most stocks and sectors, and even those doing well aren’t really going up. Thus, you should remain cautious, holding plenty of cash and keeping any new buys very small in size.
If you want to go bargain hunting, we’re not dead set against that; again, there are areas of the market that are holding up well, and let’s not forget that the longer-term trend of most indexes remains up. Plus, we are beginning to see a lot of oversold signs among sentiment and breadth measures (21-day moving average of Nasdaq new highs minus new lows is the 3rd lowest level of the past 10 years!)—we don’t trade off that, but it certainly means a bounce is possible.
Also, I’m hearing from a few people that are stuck with a few losers that have run away from them on the downside (hey, it happens to the best of us). You don’t have to bail on everything at once, but you want to avoid just holding and hoping for a bounce—try to make sure a bad situation doesn’t get much worse, preferably by letting some shares go and aiming to sell more on any bounce that does arrive.
Overall, we’re lowering our Market Monitor back to a level 5 if not lower; the goal is to mostly stay on the sidelines here while the sellers do their work. Once the downmove ends, there will be plenty of opportunities out there, but the goal is to get from here to there with as much capital as possible.
Suggested Buys
It’s easiest to spot strength in a weak tape, and that makes Ford’s (F) action all the more impressive—despite a big run into early November, the stock has actually made a little net progress since then while most things have melted down. Yes, F could eventually get caught up in the selling, but the longer it holds up, the better the chance it has another leg up. A dip into the 19 area (50-day line near 18.5 and rising) would be tempting to start a position if you don’t own any.
Silicon Labs (SLAB) is another name that’s holding up extremely well—just looking at its chart, you’d have no idea a correction was going on in the market. We’re OK taking a swing at it here, albeit with a stop in the 180 area.
WillScot (WSC) is actually hanging around its 25-day line, as big investors have been unwilling to dump any shares. If you want in, you can start here or on dips, with a stop near 36.
Suggested Sells
We had another rash of stocks hit their stops this week. Admittedly, if you have a ton of cash and small positions in some of these, you could consider giving them a bit more rope, but as always, we’ll just follow the stops that we had listed.
Albemarle (ALB)
Camping World (CWH)
Civitas (CIVI)—oil stocks getting hit this week tripped loss limit
Cloudflare (NET)
Enphase Energy (ENPH)
Goodyear Tire (GT)
Livent (LTHM)
Pioneer Natural Resources (PXD)
Roblox (RBLX)
SAIA Inc. (SAIA)
Tesla (TSLA)
Suggested Stops
Capri (CPRI) near 57
Diamondback Energy (FANG) near 96
KLA Corp. (KLAC) near 384
Lennar (LEN) near 104
MP Materials (MP) near 39.5
ON Semi (ON) near 56.6
Palo Alto Networks (PANW) near 505
Pure Storage (PSTG) near 28.5
Silicon Labs (SLAB) near 180
Trupanion (TRUP) near 111
WillScot (WSC) near 36