In Monday’s issue, we considered whether the market was broadening out because the S&P 500 was nosing to new highs and some other areas were finding buyers. But that all changed on Wednesday, when the market suffered its worst selloff in months, supposedly due to political worries, before bouncing back modestly during the past day and half.
What do we think? First, the long-term trend remains firmly up for all indexes and leading stocks. Thus, we think it’s still a bull market overall, which is obviously important.
The short- to intermediate-term trend is more of a question mark. If all the major indexes were “in gear” on the upside during the past few weeks, we’d feel strongly that this news-driven decline was likely a buying opportunity. However, as we’ve written repeatedly, the market has not been in gear—the Nasdaq has been the sole index hitting new highs in recent weeks, while the rest of the indexes have languished.
Right now, we think it’s best to think of Wednesday’s huge distribution day as a shot across the bow—the lack of progress for three months (or longer) in most indexes, combined with the strong selling pressure this week and an increase in the number of stocks hitting new lows, is a yellow flag. Because of that, backing off a bit (by selling a loser or maybe taking partial profits in an extended winner) makes sense.
But we certainly wouldn’t throw in the towel because the leading growth stocks and leading index (Nasdaq) haven’t broken down. In fact, going through a couple hundred charts last night, most growth stocks have pulled back modestly after huge runs during the past four weeks.
The next few trading days will be key. If the market can hold up or advance from here, it would raise the odds that Wednesday was one big shakeout. But a meager rally followed by another round of intense selling pressure would probably tell us an intermediate-term top could be forming.
Right now, though, we’re just going with the evidence in front of us—most of the market is treading water, but leading Top Ten stocks and the Nasdaq are still in good shape. We’re likely to knock our Market Monitor down a notch on Monday, but net-net, you should remain mostly bullish and see how the market handles itself from here.
BUY IDEAS
Adobe Systems (ADBE 136) is a liquid leader, has been in a very persistent advance since the start of the year, and had a big shakeout to its 50-day line on Wednesday. But it’s snapped back since, and encouragingly, the volume on yesterday’s rebound was larger than the volume during Wednesday’s selloff. We think you can buy some here with a stop just below 130.
Dycom (DY 107) surged out of a long base in mid-April and has traded very tightly since, even through this week’s gyrations. If you don’t own any, you could nibble here or just wait for a decisive push above 110 to enter, with a stop around 102.
GrubHub (GRUB 44) has backed off in an orderly fashion during the past two weeks following its huge earnings move late last month. You could buy a small position here if you don’t own any with a stop near 41, and look to buy more on a push above 46.5 in the days or weeks ahead.
Vertex Pharmaceuticals (VRTX 118) has been as cool as a cucumber during the past couple of weeks, consolidating quietly in the mid-110s as volume has quieted down. Now it’s beginning to push higher a bit—you could start a position here with a stop near 109, and look to average up if VRTX moves above 122 and the market gets back in gear.
SELL IDEAS
Tal Education (TAL 127) had a great run in recent months, but this week, it experienced some huge-volume churning (lots of volume and volatility, but no progress). The stock isn’t in awful shape, but we think booking some partial profits here makes sense, while holding the rest.
Meanwhile, we have seven outright sells this week: Copa Holdings (CPA 109), Criteo (CRTO 50), Jazz Pharmaceuticals (JAZZ 150), Madison Square Garden (MSG 196), Metzler (MTZ 42), Synopsys (SNPS 71) and Wabash National (WNC 21).
SUGGESTED STOPS
ASML Holding (ASML 135) near 129.5
Applied Materials (AMAT 45) near 40.5
Arista Networks (ANET 145) near 133
Chipotle Mexican Grill (CMG 488) near 465
Coherent (COHR 254) near 210
Dave & Buster’s (PLAY 67) near 62
Exact Sciences (EXAS 31) near 27
FMC Corp. (FMC 74) near 69
Grand Canyon Education (LOPE 77) near 72
HubSpot (HUBS 69) near 64
Huntsman (HUN 26) near 24
Jabil Circuit (JBL 29) near 27.5
KB Homes (KBH 21) near 19.9
Lam Research (LRCX 153) near 136
LendingTree (TREE 157) near 134
Marriott Vacations (VAC 111) near 103
Melco Crown (MLCO 22) near 20
Micron Technology (MU 28) near 26.8
National Beverage (FIZZ 86) near 80
Paycom Software (PAYC 65) near 60
Portola Pharmaceuticals (PTLA 39) near 38.5
PRA Health Sciences (PRAH 70) near 65
Skyworks (SWKS 104) near 98.5
Square (SQ 20) near 18
Take-Two Interactive (TTWO 68) near 63
TAL Education (TAL 127) near 112
Western Digital (WDC 87) near 83
Wix.com (WIX 76) near 70.5
XPO Logistics (XPO 53) near 49