The Bull Market Stumbles

It was a tough week for stock markets across the board, with the Dow Jones down 3.71%, the S&P 500 falling 3.63% and the NASDAQ tumbling 4.26%. The MCSI Emerging Markets Index also fell 4.99%.

You had one big gainer in your Bull Market Alert portfolio: last week’s recommendation Luxoft Holding Inc. (LXFT), which added 5.73%.

Both Luxoft and NetEase, Inc. (NTES) also hit new 52-week highs.

Several positions fell below their 50-day moving averages and moved to a HOLD. These include ULTA Salon, Cosmetics & Fragrance, Inc. (ULTA), Alaska Air Group, Inc. (ALK) and ProShares Ultra Nasdaq Biotechnology (BIB). You were stopped out of Big Lots, Inc. (BIG) on Friday on the back of a massive — and puzzling — sell-off in the U.S. retail sector.

After rallying hard in the month of October, it looks like the current “bull market” has failed. And it only lasted three weeks.

Of course, there are all sorts of ways to define a bull market. But let’s use the simple and objective 200-day moving average. Anything above that level is a bull market. Anything below it is a bear market. This measure is not perfect, but it is a surprisingly effective rule of thumb.

And after ending a two-month streak below its 200-day average, the S&P 500 rose back above it on Oct. 23. 14 days later it dropped back below it.

According to data from sentimentrader.com, looking back farther to 1928, stocks which spent at least two months below the 200-day average, then popped above it only to fail quickly, occurred 19 times. Over the next 1-3 months, only six occurrences showed a positive return. And those average returns were far below average.

The news has been a lot better over the past 30 years. There have been four such signals, three of which led to excellent gains over the next six months.

With the market having just entered the most positive six months of the year, I’m inclined to be more positive than what the historical average might suggest. The broader U.S. indices are entering technically oversold territory and are due for a bounce.

That said, the current whipsawing market remains extremely challenging and frustrating.

I’ll be back with a new Bull Market Alert recommendation next week.

Portfolio Update

Alaska Air (ALK) gave back 2.72% over the past week. Alaska Air cut its fuel cost forecast by $0.04 recently — a 37% year-over-year decrease and 8.2% lower than just last quarter. The International Council on Clean Transportation (ICCT) also recently ranked ALK first in fuel efficiency for U.S. airlines for its fifth year in a row. ALK dipped below its 50-day moving average (MA) last week to become a HOLD.

NetEase, Inc. (NTES) rose 0.88%. NTES reported earnings last Wednesday, spiking to a new 52-week high the following day, only to float back down and end the week slightly higher on Friday. NTES reported a jump in third-quarter profits with revenue more than doubling to $1.05 billion. NetEase’s primary revenue source, online gaming, jumped 43% to $820.2 million. NTES is a BUY.

Paycom Software, Inc. (PAYC) lost 8.56%. PAYC priced a secondary offering of 4.5 million shares at $42.15 per share last Friday, nearly 5% below Thursday’s closing price, putting short-term downside pressure on the stock late last week. PAYC is a BUY.

Luxoft Holding Inc. (LXFT) added 5.73% last week. LXFT reported an earnings beat last Tuesday of $0.84 earnings per share (EPS) vs. an estimate of $0.71 EPS. Revenue was also higher, coming in at $161.5 million vs. the estimated $159.88 million. Several firms raised price targets and reiterated a “Buy” rating. LXFT is a BUY.

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