Ugly week in the market once the last few days knocked everything down hard. We had hit the highs of 1872 on 20 point Wednesday rally in the SP 500, then it all reversed Thursday and then some, and more downside Friday.
We had discussed in the last few weekend editions that the SP 500 index was masking alot of deterioration underneath in the form of Biotechs, Momo stocks etc. At some point the “Generals” would have to follow down and take the larger cap index down as well. This sell off has been led by the NASDAQ, Biotech, and Small Cap indexes… the same prior leaders.
From viewing several charts until our eyes were glazing over, we think another 5% down on the NASDAQ to 3800 will not be a surprise, but that 4004 is also a 23% fibonacci pivot level and we are close to that as well. Biotechs had a parabolic rise to the February highs, but after the initial massive drop, you always get a pretty strong rally back. We got fooled with a brief snap back mid week but it didnt last. Watch 200 on the IBB ETF to contain the damage (Currently 215).
The SP 500 should also fall further and we outline some interesting charts that explain why the market may have more downside to come yet below:
Below we see the NASDAQ chart showing the break of the 30 week MA line, consistent with prior deep corrections. 8.5% so far, and 13% the last two big ones…
Below that we show the % of NASDAQ stocks above their 50 day MA lines, its down to about 25%. Close to prior correction lows. The last two were 17-20% of stocks, so we can go lower…
The final chart is the IWM ETF for the Russell 2000… another 8% down would put it at a 38% fib retracement.
Bottom line, we can make arguments for lower prices. That and the % of Bullish Investment Advisors is still high at 54%.
Best thing to do is build a list of relative strength stocks and probably wait a bit to consider entry.
Here is a list of some we like that have also been on recent Weekend Editions;
THRM; HOLI; GNRC; GLOG; MYGN; AFOP; AYR
The good news is we are in the 7th inning probably of this correction but the last 2 innings could be a bit ugly. Now, if somehow the markets snap back and rally hard, it wont be the first or last time we have seen it the last few years… but, we think this correction is a larger one and long overdue.
Last week was a volatile week as we started the week up and ended the week down. We will share some thoughts on the markets, sectors, forecasts, and more this weekend to try to make some sense of it. Also, as usual a list of stocks that we find attractive for further review.
Growth stocks have been under pressue as institutions have been selling aggressively and thereby driving the Price to Earnings ratios back to more reasonable levels. Only the strong will survive this valuation shakeout, or what we called last weekend a “Re Evaluation” of valuations. Not many former leaders have gone untouched, including Facebook, Netflix, Amazon, Tableau Software, Linked-In, Biotechs across the board, and the list goes on and on and on of major collapses in share prices and valuations.
CHARTS ON BIOTECH, GOLD, SP 500— NOTES AFTERWARDS
The reason we believe is the market is sensing inflation vis a vis commodities, and probably higher interest rates down the road. Higher interest rates are usually not conducive to high PE ratios in growth stocks, so you get a contraction in valuations paid for earnings. Last weekend we talked about Coal stocks, commodities, Gold getting close to a pivot low etc. We threw out ideas for the shift such as EEM and EDC ETF’s, ACI in the coal space, UPL in Natty gas and you get the idea. All of those areas were up this week while the growth stocks were down.
We are probably seeing as shift to value stocks at this latter stage of the Bull, so small cap value for example like SPCB (Our last Business Disruptor pick) are likely going to hold up and or work well. Commodities type plays like Arch Coal working well, Ultra Petroleum, etc. The areas formerly disdained now working into favor. Gold stocks likely finishing their correct as we surmised last weekend and selectively may outperform. We would like to see Gold over 1310, then 1325 though to confirm this last correction is over. Also 1275 is key support for Gold and needs to hold, otherwise it’s just a bounce. We have’nt plopped any money down in Gold stocks yet from our March 16th warning about the sector.
Now that all said, all is not lost. We lined up 4000 on the NASDAQ last weekend as our likely bottoming area and 218 on the IBB ETF as another pivot low. The NASDAQ rallied hard early in the week making our 4000 forecast look stupid, but then we all saw a dramatic decline late in the week. Also, IBB ETF rallied to 245 briefly, but then had a 2 day setback to 226 as of Fridays close, getting close to our 218 projections for a pivot low and reversal area. So this week we would advise watching 4000 on the NASDAQ and 218 on the IBB ETF as key reversal areas to hold. If those both break down, there are bigger problems. The SP 500 is holding tenatively to 1857 as its support line as well.
What to do? Well last weekend we gave a list of stocks we liked for further consideration. MYGN rallied 24.7% last week from that list, HOLI up 5.5%, SYNA up 5.1%, UPL up 8%, SBOTF at one point up 13%. On the list of losers was UBNT down 8.8%, GMCR down 4.8%.
This weekend we have a new list of stocks for further review that we like, and in some cases we will point out key support areas that need to hold.
GNRC; ALGN ; AFOP; CLR; SYNA; FSS; FF; and yes we still like UPL and ACI but they broke upwards hard already.
In general though, its good to be patient in adding any new positions near term till we see if the dust settles a bit on the street.
Once again, we are compiling out thoughts on the Weekend Edition regarding market action, sectors, opportunities, and our list of 8-12 companies that look attractive. Also again pointing out a stock with 100-400% gain potential in the coming 12 months that has now been discovered this weekend on Seeking Alpha Pro as their TOP IDEA (And it’s not our article). (Read on)
Let’s start with the market in general. The NASDAQ we think could visit 4000 or close before a pivot bottom, about 3-4% away.
The SP 500 is somehow holding but but it is masking underlying weakness in tons of growth stocks, biotech, and momo names over last 4 weeks. A break of 1847 support area could quickly give way to a quick drop and correction to 1775-1800 we think. We would watch 1847 as key support, same number we have given out for a few weeks and the SP 500 has managed to hang in there.
Biotech has been under obvious pressure and frankly well deserved. Traders were on margin, they were overbidding up shares to unsustainable valuations and the buzz factor was very extreme on the sentiment side. We think the IBB ETF will bottom no worse than 218 from current 229 levels and we pointed that out on Wednesday in our Mid-Week notes on StockReversals.com (Chart below)
Gold peaked out a few weeks ago, but on the March 16th weekend edition we warned of that likelihood specifically saying the trade was crowded and that usually does not end well when everyone is on the same side of the trade. Gold has fallen $100 an ounce since that weekend edition two weeks ago, and Gold stocks have been pummeled. We think they are setting up for a reversal here shortly as the pullback is Gold is a normal Wave 2 sentiment correction. 1265 is a target zone for a bottom, but the Gold stocks will bottom first. Amongst our favorites again is MUX, THM to name a few.
In the Mid Week update we pointed out Emerging Markets (EEM) and ACI (Arch Coal) as opportunities. They both rose over the last few days. Go where everyone is not… and when Wall street is pounding the table to SELL… our spidey sense kicked in and we recommended ACI at 4.57 (Closed week at 4.95)
We also want to point out Stellar Biotechnologies (SBOTF-US, KLH.V- Canada) that we have been talking about recently. We own quite a few shares so we are biased for sure. That said, we have been recommending it since $1.13 last August and its $1.60. Well, it looks like one firm just picked up on this and wrote a Seeking Alpha Pro story this weekend, which you can access for free temporarily. His target is $7, which is a 0ver 400% gain potential in 12 months from current levels, and as much as 600% from our August 2013 Business Disruptor report. There is a reason we have been talking about it here and on Stocktwits off and on, we do the research and we like to get long what is not obvious before its obvious. Read the article and you will see why we like it so much in the immunotherapy sector. Its not a trading stock folks, its a buy and be patient stock… otherwise dont bother. The big gains are usually made spotting opportunities early and being patient during consolidations.
A few interesting things we are seeing of late:
Copper is moving up; The Japanese Nikkei looks like it has formed a bottom after a 13% decline from highs; The Dollar has been rising of late, putting a bit more pressure on stocks and gold etc…. this may not last too long.
On to a list of stocks we find interesting if not attractive, especially given the growth stock swoon of late which is getting over done. The correction has been very very healthy, margin buyers were at 5 year highs and this will self correct… bringing up opportunities for the savvy investor.
UBNT; MTW; FB; GMCR; ACI; MUX; HOLI; MYGN; SBOTF; UPL