I want to offer my view on the stock market today post-Brexit, now that we’ve had a week’s worth of action (and reactions) to digest. I first offer up some thoughts from a long-term perspective, then work down to an intermediate-term view and a short-term view. I include some fundamental thoughts, too.
And I end with a stock that’s rising up my watch list based on its excellent fundamentals and its very impressive, resilient action.
But first, let’s hit the market.
Long-, Intermediate-, Short-Term Outlook
LONG-TERM VIEW
• Taking a (gigantic) step back, nothing has changed my secular view that we’re either in the eighth or ninth inning of a multi-year bear market (that started in 2000) or we’re in the second inning of a new multi-year bull market (the S&P 500 emerged to new highs in 2013 after 13 years of no net progress). I’m not trading based on this, but either way, I continue to think the next six to 10 years are going to be very good for stocks based on the market’s mega-cycles over the decades and the huge investor sentiment shift toward safety.
• I also continue to think the odds favor the broad market having bottomed in January/February, in large part because energy prices (and, hence, the junk bond and broader credit markets) aren’t under anywhere near the pressure today that they were back then. Things can change, but the ramifications of Brexit for most stocks are less than the ramifications of a credit crunch, which the market was facing at the start of the year.
• None of this is to say a long-term decline can’t get underway—it can. But right now, the longer-term picture is more neutral than bullish or bearish.
INTERMEDIATE-TERM VIEW
• In the intermediate-term, though, I’m cautious—my Cabot Tides (intermediate-term trend indicator) turned negative during last Friday’s meltdown and they remain negative today. That’s caused us to raise cash over the past few days (we’re about 50% cash in my two advisories).
• Following such a sudden, severe drop off the market’s highs, I would say there’s a 75% to 80% chance that the first bounce or two (including this one) will meet with resistance in the weeks ahead. It would be different if a waterfall drop were to occur after a few weeks of selling (at that point it could be a selling climax), but in the current instance, there are likely many big investors who haven’t had a chance to cut exposure or, at least, re-position their portfolios. That should lead to selling into rallies going forward.
• What about the other 20% to 25%? While the market hadn’t been declining much before Brexit, it had been chopping around for 18 months. Thus, I do think there’s a chance this event served to crystallize bearish sentiment, knocking out the remaining weak hands, and paving the way toward a sustained advance from here. A surge all the way back to the June highs in the indexes would strongly hint that this scenario is playing out.
• It’s still early, obviously, but Monday’s total of 350 stocks hitting new lows (NYSE and Nasdaq combined) will be worth watching on any retest of the indexes’ lows in the days ahead. Any dry-up in the readings during a retest could tell you that selling pressures are beginning to dry up, something we see around intermediate-term lows.
SHORT-TERM VIEW
• I’m not really a short-term investor, but I am watching some ‘tells’ for the stock market today to see if the market’s character is changing.
• Today that means I’m keeping an eye on ETFs that track financial stocks (symbol XLF), the chip index (SOX) and defensive stocks (XLP and XLU). Right now, defensive dividend stocks are in favor as investors yearn for safety, but I’ll be looking for any breakdowns in XLP (below 52) and XLU (below 49), while simultaneously looking for an upturn in the XLF ETF (above 23.2 or so) and the chip index (above 695).
Most importantly, I’ll be watching the action of leading growth stocks—they will probably be the ones to tell us when the market is ready to get going. At this point, most of the nascent leaders of the February-April rally phase have broken down, though a few are holding up very well.
To be clear, it’s still early to distinctly identify new leaders in the stock market today—i.e., just because a stock has held up well for a week doesn’t mean it’s going to rip higher in the near-term. But it’s definitely worth keeping an eye out for little-known growth stocks that have big potential and strong charts.
A New Leading IPO Stock
One stock that checks those boxes is recent IPO SiteOne Landscape (SITE), a unique retail story I think can go far. Here’s what I wrote about it in Cabot Top Ten Trader this week:
“SiteOne Landscape is aiming to do the same thing for residential and commercial landscape professionals that Home Depot and Lowe’s did for commercial contractors and do-it-yourselfers at home. SiteOne is the largest (and only national) wholesale distributor of landscape supplies, offering more than 100,000 different products (irrigation supplies, fertilizers, nursery products, landscape accessories, hardscapes like pavers and stones, outdoor lighting, etc.) via 466 stores in 45 states. The market is huge (about $16 billion year) and, as the only one-stop shop, SiteOne dominates it, with four times the market share of its nearest competitor—and yet the firm has just 9% of the overall market, leaving plenty of room for growth. Because of the fragmented market, acquisitions are a key part of growth, and SiteOne is the only industry consolidator right now. Combined with excellent internal growth, we see big potential—in the first quarter, sales rose 45% from the prior year, about half from acquisitions. (Its two buyouts this year gives it the #1 market share position in irrigation in Southern California and the top spot in the hardscapes market in the Carolinas.) Analysts see the company’s top line growing 10% to 15% this year and next, and earnings booming, thanks to leverage in the business model. If management makes the right moves and continues on a steady acquisition spree, we think this story can go very far. We like it.”
The stock’s main shortcoming is that it’s very thinly traded—just $10 million or so of trading volume—and has only been public a few weeks. If you want my suggested buy range and loss limit, definitely subscribe to Cabot Top Ten Trader (I present my research on 10 leading growth stocks every week, along with buy and sell ranges and follow-up advice), but suffice it to say a nibble on price dips could work, though I’m most interested in adding SITE to my Watch List.
It could be a new leader in the market’s next sustained advance.
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