In last week’s update we reviewed the market’s good and bad, and we wrote that “we think the odds strongly favor the next big move being up. But, near-term, there’s still a decent chance that growth and other Top Ten-type names could see more backsliding (or bottom building, if you prefer) before breaking out.” Our Market Monitor has crept up of late but is still at a level 6 (out of 10).
The action this week, as investors returned from the long weekend, definitely boosts the odds that more base-building is needed, with basically all major indexes down in the 2.5% to 3.5% range in the first three days of the week.
If you’re looking for reasons for the selling, it seems like renewed fears of a possible recession or major slowdown is picking up—the 10-year Treasury is down about 22 basis points on the week (0.22%)—though these sort of worries/hopes wax and wane.
What matters more is the evidence, which has taken a hit this week. For the intermediate-term, the indexes that had perked up near their highs are back in neutral mode, while the lagging growth areas (including the Nasdaq and other growth funds) have breached some support. Defensive areas, by the way, continue to outperform, with consumer staples flat this week.
To be fair, while everything has sagged this week, the harshest selling has been seen among the former chip and networking leaders (the semiconductor index is down more than 9% this week!)—many names that showed enticing strength in August (often after earnings) have taken on water, but not many have truly keeled over. Because of that, we advise mostly taking things on a stock-by-stock basis, assuming you never got heavily invested during August.
All told, the next week or two should be vital—we consider this backsliding a “test” of the post-August rally, so if the buyers can show up soon, especially when it comes to high relative-strength stocks, this could prove to be a final shakeout that paves the way to higher prices (likely with the help of a supportive Fed later this month).
If the selling continues much past this week, though, it’s likely the correction that began in mid-July has more work to do and a re-test of the August lows is in play. For now, we’ll leave our Market Monitor at a level 6 and watch things closely.
SUGGESTED BUYS
Clearwater Analytics (CWAN) is more thinly traded and can move quickly, but its breakout in early August had some solid follow through and this week’s dip has been on light volume and is finding a little support near the 25-day line. It doesn’t hurt that many software stocks remain in solid shape. We’re OK with a small buy here and a stop under 22.
DoorDash (DASH) has pulled back modestly and on whisper-quiet volume after its off-the-bottom, earnings-induced rally in the first half of August. Two ways to play it if you’re interested—a small buy here-ish with a stop near 115, or alternatively, wait for a move above 132/133 with a stop around 120.
SUGGESTED SELLS
Partial Sells
If you have a good-sized position, we would favor booking some partial profits in Guidewire Software (GWRE) on today’s solid earnings pop.
Full Sells
Credo Tech (CRDO) – pulled back with tech names and then cracked on earnings
GoDaddy (GDDY) – it’s had an extended run and we’re not big fans of the straight-down action this week
Sweetgreen (SG) – complete give-up of its earnings move
TransMedics (TMDX) – we could see a rebound here, but the drop from its peak, giving up all of its recent earnings move and relative strength, smacks as abnormal.
SUGGESTED STOPS
Agnico Eagle (AEM) near 74.5
Aspen Aerogels (ASPN) near 24.5
Barrick Gold (GOLD) near 18.5
Carpenter Tech (CRS) near 127
Carvana (CVNA) near 138
CBRE Group (CBRE) near 105
Cheniere Energy (LNG) near 178
Clearwater Analytics (CWAN) near 21.8
Coupang (CPNG) near 21.5
D.R. Horton (DHI) near 169
Green Brick (GRBK) near 68.5
Guidewire Software (GWRE) near 145
Howmet Aerospace (HWM) near 88
Insmed (INSM) near 69
Monday.com (MNDY) near 238
ServiceNow (NOW) near 790
Spotify (SPOT) near 320
TG Therapeutics (TGTX) near 20.5
United Therapeutics (UTHR) near 333
Zeta Holdings (ZETA) near 22.5
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