The mid-May to early-June period saw the market take a few baby steps, which we wrote about here and in the Monday issues—it had put itself in position to do some good things in the intermediate term, but we had to see some honest-to-goodness strength and upside follow-through. Of course, that didn’t happen, with the bears smacking the major indexes last Thursday, keeping the trends down and keeping us defensive.
Given the carnage, we have a few messages in this update. The first is to continue to take things on a day-to-day basis—we’re starting to hear/read a lot of “the market can’t go up until the Fed eases up” or something like that. Well, maybe—but maybe not. And even if that’s true, there’s nothing that says that can’t happen sooner rather than later. The market can do whatever it wants, when it wants, and one thing we can all but guarantee is that when things do bottom out, few will be forecasting it.
Second, the latest leg down has brought another round of lower-low extremes. For instance, just 2% of the S&P 500 closed north of their 50-day line yesterday, which is down there with any past bear phase, while north of 2,000 NYSE and Nasdaq stocks hit new lows yesterday. As always, these can get more extreme, but it’s also a fact that this decline is extended in price, time and breadth—another reason to keep your eyes open.
In the meantime, we advise focusing mostly on building a watch list of new potential leaders; we’ve been tweaking our screens to find more stocks that, while not near their highs, have shown some resilience of late and big-volume support.
A couple more points that have come up frequently via email. First, on shorting—if you want to play the short side, that’s fine, but we’d advise doing so after a two- or three-week rally into resistance. Shorting here may work, but it’s the equivalent of buying stocks after a strong seven-month rally when all the news is good … not a high-odds play. Whatever you do, just remember the big money will be made in the next big uptrend.
Finally, this latest leg down has taken everything with it, including many strong energy stocks. We’re honoring our stops, but if you have big profits in a couple names that haven’t hit stops (and have booked partial profits on the way up), we’re OK giving them some wiggle room—while we own the stocks and not the commodity, we’re impressed with the resilience in oil and gas prices given a rampaging Fed and a slowing economy. Don’t get us wrong, we wouldn’t ignore the weakness, but 15% to 20% shakeouts after such huge runs isn’t abnormal (yet) in our book.
In sum, the bears remain in control, which means you should be mostly on the sideline. That said, we’ve been through these bear phases before, including ones much worse than this one, and we’ve been able to not just stay (mostly) safe during the decline but also leap on many winners when the trend turns up. There will be some great opportunities given this washout, but more patience is needed as we wait for the sellers to finish up their work.
SUGGESTED BUYS
There’s not much out there that looks good and normal, but Dollar Tree (DLTR) is one—yes, there’s obviously a defensive aspect here, but the big Target-related plunge followed by a huge earnings gap in late May is a positive (as is the fact the stock has held most of those gains). We’re OK nibbling here with a stop in the 140 area.
These are not high-odds plays, but some energy names have (a) pulled back very sharply but not (at this point) abnormally, and (b) are into an area of support, often near the 50-day line. PDC Energy (PDCE) is an example, with a sharp dip into the lower 70s—yes, maybe it just keeps plunging, but a nibble here with a reasonable stop (10% to 12%) seems like a decent bet.
Many biotechs have actually held up OK, including United Therapeutics (UTHR), which has pulled in normally to its 25-day line. If you want to take a swing at it here with a stop near 200, you can.
Outright sells:
Chart Industries (GTLS)
Chemours Co. (CC)
Chesapeake Energy (CHK)
Marathon Oil (MRO)
Schlumberger (SLB)
Wesco (WCC)
SUGGESTED STOPS
Alpha Metallurgical (AMR) near 139
Antero Resources (AR) near 34
Arch Resources (ARCH) near 149
Consol Energy (CEIX) near 47
Coterra Energy (CTRA) near 27.5
Electronic Arts (EA) near 124
EQT Corp. (EQT) near 36
Fluor (FLR) near 24.5
Funko (FNKO) near 19.2
Nexstar Media (NXST) near 156
Teck Resources (TECK) near 37
Valero (VLO) near 114