The market had a very volatile week with investors reacting to any move in interest rates, but it’s best not to get caught up in the whippy day-to-day action. Taking a step back gives you a better look at the evidence.
Right now, the market remains in some sort of short-term correction. Most of the indexes we track aren’t far off their recent highs, but they are below their 50-day lines, and haven’t made much net progress over the past couple of months. Thus, it’s fair to say the intermediate-term trend is, at best, neutral at this point.
Longer-term, though, we haven’t seen signs that the market is etching a major top. The broad market, for instance, remains relatively healthy, with few stocks hitting new lows and many stocks acting just fine. So the odds favor this being something in between a very brief shakeout and a correction of a few weeks (possibly a “standard” September-October retreat), but not a multi-month debacle.
Therefore, we’re leaving our Market Monitor where it was on Monday—at level 7 out of 10. We think holding some cash is appropriate (maybe 25% to 35%, depending how your stocks are holding up), and we’d probably keep new positions smaller than normal for the time being. (Also, we advise using looser loss limits given the volatility we’re seeing.) But you should also give your resilient stocks a chance to hold up and resume their uptrends, and we certainly wouldn’t be selling wholesale.
One big change that has been going on below the surface is that money is clearly flowing toward growth-oriented stocks and sectors, and away from yield sectors. We see this most dramatically in the outperformance of the Nasdaq (which is still above its 50-day line) versus the Dow and S&P 500.
Obviously, that shift can always reverse (possibly based on what the Fed says next week), but right now, growth stocks are coming into favor—something to keep in mind when the market comes out of its correction.
Buy Ideas
Abiomed (ABMD 124) is one of many growth stocks that broke out just after Brexit, had a decent move for a few weeks, and recently pulled back just below its 50-day line for the first time since the breakout. Now ABMD is showing signs of resuming its uptrend—you could buy a small position around here with a stop around its recent lows of 115.
Following its earnings gap late last month, we think Autodesk (ADSK 67) remains in good shape—it dipped to its 25-day line before bouncing, and the stock’s volume patterns have been solid. It looks buyable here with a stop near 63.
Cirrus Logic (CRUS 54) has gone bananas during the past week as Apple (AAPL) rallied sharply. (Apple makes up the majority of Cirrus’ revenue.) Given the power shown on the move, we think the stock wants to move higher, though we’re not anxious to chase it in this market environment. You could nibble on dips to 53 with a stop around 48.
We continue to like the action in Etsy (ETSY 14), which has traded calmly in recent weeks. Shares have now consolidated between 13 and 14.5 for the past few weeks following a monstrous-volume spike in early August. You could buy a little here with a stop near 12.5.
Gigamon (GIMO 51) also consolidated in a fairly tight range for a few weeks following a big advance, and this week, it’s surged to new highs on great volume. GIMO could easily pull back a bit, especially if the market remains wobbly, so if you want in, nibble on dips with a stop around the 50-day line (near 44).
Nvidia (NVDA 63) has been a leader all year, and our gut says the stock probably needs more rest before another sustained run. But our eyes see that the stock has barely budged despite its advance, and bounced nicely off its 50-day line on Monday. You could nibble here with a stop around 57—and should the market get going and NVDA lift above 64, you could consider buying more.
Yelp (YELP 38) continues to consolidate in a relatively tight range (36 to 39-ish) following its earnings gap in August. With the 50-day line nearing 34.5, we’re OK with a small buy here or on dips, and a stop near 34.
Sell Ideas
We have three outright sells this week: Louisiana-Pacific (LPX 19), Newfield Exploration (NFX 41) and Paycom Software (PAYC 49).
Plus, don’t forget to book some partial profits along the way if one of your stocks has exploded higher. NetEase (NTES 240) is a good example—it’s soared off its 50-day line on huge volume, though it’s now 30 points or so above its 50-day line. Definitely hold most of your shares, but selling one-quarter to one-third of your holdings also makes sense.
Suggested Stops
Berry Plastics (BERY 44) near 42
Callon Petroleum (CPE 14) near 13
Cimarex Energy (XEC 127) near 123.5
Communications Sales & Leasing (CSAL 31) near 29.5
Copa Holdings (CPA 89) near 77
Electronic Arts (EA 83) near 79
Insulet (PODD 42) near 39.5
Jack in the Box (JACK 99) near 94
LGI Homes (LGIH 36) near 34.5
Line Corp. (LN 44) near 41
Masimo (MASI 59) near 55
Microchip Tech. (MCHP 60) near 57.5
NetEase (NTES 240) near 210
NuVasive (NUVA 67) near 62.5
Nvidia (NVDA 63) near 57
Parsley Energy (PE 33) near 29.5
Penumbra (PEN 74) near 67.5
Pioneer Natural Resources (PXD 176) near 170
Silicon Motion (SIMO 51) near 48.5
Tata Motors (TTM 41) near 38.5
Thor Industries (THO 79) near 75.5
TransDigm (TDG 285) near 278
Trex (TREX 57) near 55.5
Twilio (TWLO 54) near 48.5
XPO Logistics (XPO 34) near 32
Wingstop (WING 29) near 28.5
Zendesk (ZEN 30) near 28.5