A new threat by President Trump to apply 10% tariffs on an additional $200 billion in Chinese imported goods put the U.S. stock market on a slicker path to a potential market correction on Tuesday. The Dow Jones industrial average and the NYSE composite battled to stay above their key 50-day moving averages.
Volume rose on both main exchanges vs. Monday, according to early data readings. That implied unusually heavy institutional selling.
The Dow industrial average and the NYSE composite slid 1.1% and 0.6% in stocks today, respectively, but both rebounded off their session lows. The Dow industrial average, finishing at 24,700, is now down about 0.1% since Jan. 1.
Those losses, however, were not as frightening as the sell-offs among China mainland indexes. Hong Kong’s Hang Seng benchmark dropped 2.8% overnight and cut its long-term 200-day moving average for the first time since December 2016. The Shanghai composite skidded 3.8% lower, hitting lows not seen since June 2016.
Meanwhile, Netflix (NFLX) and other high-octane growth stocks that are leading the digital transformation of the global economy continued to flex strength.
Netflix, the eighth largest company on the Nasdaq exchange by market cap, jumped 3.7% to a new high of 404.98 in brisk volume, 84% above its 50-day average. The big move helped the Nasdaq composite cut its early 1.4% drubbing to less than a 0.3% decline by day’s end.
Netflix joined IBD Leaderboard on Dec. 6, 2016, as the stock was forming a base next to a much larger set of bases. Then the stock broke out past a correct entry point at 129.39 in early January 2017. The stock has since advanced 208% and is currently extended from a proper buy point.
At 7725, the Nasdaq holds a 12% year-to-date gain. The Nasdaq 100 also hustled off its intraday low, slipping just 0.3%. Both the Nasdaq composite and the Nasdaq 100 are trading less than 1% below their all-time highs.
The S&P 500 chopped its early decline to 0.4% as strength in defensive stocks, including utilities, offset weakness in automaker, steel, construction and farming machinery, chemical and coal stocks. Biotech, movie, drug store chain and auto parts firms also rallied.
The small-cap S&P 600 outperformed, losing just 0.1%. At 1044, the index is up 11.5% since Jan. 1.
Also within IBD Leaderboard, at least three top-shelf retailers seem to be feeling less of an impact on the escalating tit for tat between the world’s two largest economies.
Don’t Discount The Retail Sector
Discount and variety store chain Five Below (FIVE), premium yogawear retailer Lululemon (LULU) and online marketplace Etsy (ETSY) are all holding up well since their excellent breakouts in recent months.
All three Leaderboard names show strong double-digit earnings and sales growth in recent quarters. Etsy soared 28% last week on news that it’s adding new services for sellers while also raising transaction fees.
Etsy grew its top line by 19%, 21%, 24% and 25% vs. year-ago levels in the past four quarters. The Street expects Q2 revenue to jump 25% to $127.1 million and earnings to rise 150% to a nickel a share. The Brooklyn-based company has 119 million shares outstanding and a float of 116 million.
The stock has rallied 103% since bolting out of an eight-week cup without handle at 21.96 on Feb. 21.
When searching for excellent stocks, be sure to check that a company meets the C in IBD’s CAN SLIM seven-point investing paradigm. C stands for current earnings growth of 25% or more in the latest quarter. An acceleration in the rate of year-over-year growth? Even better. Institutional investors highly prize companies that are able to post bigger profit gains vs. recent quarters.
Lululemon, a member of the IBD 50, still sees the majority of its revenue coming from North America. The Vancouver-based firm has posted EPS increases of 3%, 19%, 33% and 72% in the past four quarters. In other words, it’s shown growth acceleration in the bottom line for three periods in a row.
The Street sees earnings rising 26% to 49 cents a share in the July-ending fiscal second quarter.
Financing Stock Market Success
Financial payment, credit history and transactions-related firms are also holding up well. TransUnion (TRU), Visa (V) and Mastercard (MA) are keeping their solid long-term uptrends intact. The former, also in IBD Leaderboard, reversed from mild losses to gain 0.6%.
Square (SQ), the innovator in point of sale technology and financial services for small and medium businesses, doesn’t seem to be perturbed by Trump’s aggressive tariff policy. The San Francisco-based company dropped 4% in the early going before shaving the loss to less than 0.4%.
At 65.94, the stock is holding on to a 15% gain past a 57.29 entry in a nine-week cup with handle.
That base also shows elements of a double bottom, one of the eight key chart patterns that growth investors can use to time their market buys during a confirmed uptrend in the stock market.
Wall Street forecasts Square increasing its earnings by 70% to 46 cents a share in 2018, then doing it again to 78 cents in 2019.
Tariffs May Promote More Weakness In These Stocks
No doubt, commodities are being targeted by Chinese government officials with less than six months to go before critical midyear U.S. elections take place in November.
Nucor (NUE), the largest U.S. steelmaker by market value, dropped as much as 4% and flirted with its rising 50-day moving average before rebounding some to end at 65.47.
The Charlotte, N.C., firm has been locked in a trading range of 59 to 70 since January. Yet the stock is also building a new base and stands just 7% below the 70.48 peak.
Analysts surveyed by Thomson Reuters see earnings vaulting 86% to $6.67 a share this year, then easing 7% to $6.18 in 2019. Sales growth has been powerful lately, rising 14%, 30%, 22%, 21%, 29% and 16% in the past six quarters.
Tesla (TSLA) led the automakers down more than 4% as a group on a price-weighted basis. Autos finished worst among all 197 industry groups tracked by IBD each day.
But Tesla, the electric vehicle pioneer, actually needed to catch its breath following strong gains the past three weeks.
Shares closed down nearly 5% to 352.55 in heavy turnover. Watch to see if the 350 round number level offers a floor of support. Tesla also now has a nice air cushion above both its 50- and 200-day moving averages.
For now, Tesla continues to work on a huge base that stretches all the way back to September 2017. In the week ended Sept. 15 that year, the stock broke out of an 11-week cup with handle at 370.10, but reversed sharply lower the next week. The negative action triggered the golden rule of investing — keep your losses small in every investment, preferably at 8% or less.
In other financial markets, crude oil rallied amid some hopes that OPEC and Russia will agree to either no change in their production quotas or raise output only by a little. Investors will be watching the results of a Friday meeting closely.
The yield on the benchmark U.S. Treasury 10-year bond fell 3 basis points to 2.89%. Yields fall when bond prices rise. The current yield is still well off the May 17 near-term peak of 3.11%.
