A Caution Turn and a Few Ideas to Nibble On

08/15/2017 2:51 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Thursday’s implosion in the major indexes has turned the market’s intermediate-term trend down, and another batch of strong stocks broke their uptrends. Simply put, it’s time to play some defense until the buyers return, asserts Mike Cintolo, editor of Cabot Top Ten Report.

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Of course, a lot of this week’s selling has been due to fears surrounding North Korea and the possibility of an ugly military conflict there.

The fact that there’s a well-known, high-profile reason for the decline is actually a good thing in our book — should tensions be relieved, there’s a chance the market could turn right around.

We’ve seen a big spike in sentiment measures (VIX, equity put-call ratios) this past week, confirming that fear is picking up, also a good sign.

Moreover, it’s not like every stock is in terrible shape — there are plenty that remain above support; we highlight a few of these below. Also, the major indexes aren’t in terrible shape, just a couple of percent off their highs. Thus, it’s not 2008 out there all of a sudden.

Even so, the recent selling isn’t a one- or two-day event, but more of a process that’s taken place over the past few weeks. Thus, a more defensive stance is appropriate right now. If things turn around quickly, we’ll jump on some resilient stocks, but if not, we’ll stay cautious.

If you have a lot of cash on the sideline, we’re not opposed to nibbling on a resilient stock or two, but keep it small. The ideal situation is something that recently reacted well to earnings and, despite the market’s slide, has held up well in recent days.

Align Technology (ALGN) is a good example, with the stock barely budging this week. If you don’t own any, a dip toward 167 on any market drop would be tempting, with a stop near 157.

Facebook (FB) is still holding above its 25-day line, which is a clear sign of resilience. We think you could start a position here and use a stop near the 50-day line at 158.

PayPal (PYPL) still hasn’t broken down out of its tight trading range of the past few weeks (57 to 60 for the most part). With the 50-day line nearing 56, a small position here with a stop near 54 (to give it some leeway) could work.

Planet Fitness (PLNT) soared on earnings on Thursday, with volume the heaviest since the stock came public a few years ago. You could nibble here but we’d prefer to just watch it and see if it settles down.

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