Look, we had a really strong first quarter, with a 4.5% move in the Dow, a 5.5% gain in the S&P and a 9% rally in the Nasdaq. So it's pretty reasonable that we get some profit-taking. In fact, it would be highly unusual if we didn't, especially given that the Dow and the S&P have had six positive quarters in a row. So I say don't sweat the program that the averages are volatile with a bias to the downside. It's natural. It's organic. It's what needs to happen to shake out the weak hands and get better owners who want to be in for the long haul.
We moved so much in the last week, especially in the Nasdaq, while at the same time we had a weaker March in the country, perhaps because of the disappointing lack of progress in Washington, that you can expect a few more days of selling off. We should at least give back some of the big gains of the last few weeks, some of which seemed artificial to me, meaning that they may have been created by extremely motivated buyers who moved stocks themselves to enhance performance. This window-dressing at the end of a quarter often leads to selloffs when the next quarter begins.
Will it be a gigantic drop, enough that you need to sidestep it or go to the sidelines? I think you stay the course but you have to recognize that having cash might pay off when we get to the end of profit-taking and the beginning of earnings reports.
A close observer of mine on Twitter said that when I appeared on the Halftime Report today I sounded more bearish than I have been in a long time. I sure didn't want to give that impression. I just think we have to go through some profit-taking until we get to earnings season, unless we get a strong employment number on Friday, which would show things are pretty much on track. That said, after these big runs it would sure help for President Trump to get his way on some portion of his economic agenda, some cuts in taxes. The longer out that is, though, the more time we might have to spend in some sort of purgatory.
Still, I am looking at this decline as a chance to get into some high-quality stocks at better prices than I can get now. That's really the extent of my bearishness and it really is controlled by how much we have already run, especially in the Nasdaq. I respect the bull but I would prefer slightly lower prices to put a lot of money to work. That's been my view for Action Alerts PLUS, the newsletter that club members get about my charitable trust, and I am not going to pound the table to buy stocks right here if I am waiting for a discount and better prices for my trust.
What will work as we drift down? On Friday I talked about how I liked the senior growth stocks, companies like Disney (DIS) and Starbucks (SBUX) and Johnson & Johnson (JNJ) and Nike (NKE) . You can include 3M (MMM) and McDonald's (MCD) in that mix.
All of these stocks, which have extensive international operations at a time when I want to go a little more global because the world is getting stronger economically, could be jostled here before they report. I just want you to be ready for the jostling as I think this cohort, which doesn't need progress in Washington to move higher, will be a terrific place to be.
Where else to look? One thing I've learned is that the winners of the first quarter tend to stay strong for the year unless they are special situations, so why don't we examine the best-performing stocks in the S&P 500 in the first quarter to see what can continue to offer some serious outperformance.
First is NRG (NRG) , a utility that went wayward and is recovering, having gained 52% this year. I know that seems monumental but this company is a gigantic, competitive power creator, the nation's largest, and it is still repairing. It wouldn't shock me if it had a few more points to the upside.
Second is Vertex (VRTX) , up 48%. Here's a biotech company that has been trying to develop a strong cystic fibrosis franchise and seems to have cracked the code of this difficult disease. It's up to $108, but it traded in the $140s when the market first thought it had something that helped cystic fibrosis sufferers, therefore I think it has more room to run.
Third is Arconic (ARNC) and this is a tough one because Arconic is the old Alcoa. Oddly, Arconic actually spun off the commodity portion of the old Alcoa (AA) and gave its name to the spinoff, choosing Arconic for the proprietary technology and aerospace remainder of the company. Arconic has run so much because it is the subject of a proxy fight with Elliott Management trying to unseat the CEO, Klaus Kleinfeld, and replace him with Larry Lawson, a very successful aerospace CEO. This is a stock owned by my charitable trust and I have told club members that it would not be this high without the proxy contest, which makes the stock a little fraught, although it did trade three points higher than where it is right now. On the possibility of a sale, it's too cheap. On earnings, it's too expensive.
The fourth-best gainer? Activision Blizzard (ATVI) , the video game company. We like to talk about big themes to fall back on, meaning that if we pick stocks that are part of a major secular growth tailwind, when they come down -- and stocks inevitably do correct -- you don't freak out, you buy more.
Activision Blizzard as well as its colleagues, Electronic Arts (EA) and Take-Two Interactive (TTWO) , uniquely fit into the stay-at-home-and-entertain-yourself theme that has made us an awful lot of money. Of the winners so far, I think this is one you can buy right here. It is in the sweet spot of this sit-on-the-couch bull market.
Finally there's Incyte (INCY) , a drug company with a very good oncology franchise that just made a deal with Bristol-Myers (BMY) this weekend to partner BMY's most important anti-cancer drugs with a key Incyte drug. That comes on the heels of a deal with Merck (MRK) to do the exact same thing with its key anti-cancer drug.
I know lots of people think one of those two partners will buy out Incyte. I don't like to recommend a stock solely on a takeover basis, and before Incyte did the deal with Bristol I thought Merck's partnership could lead to a takeout. It is possible that one of these two actually bids for Incyte, not unlike how AbbVie (ABBV) bought Pharmacyclics even as it has a big deal with Johnson & Johnson.
The JNJ partnership still lives, but AbbVie didn't care. So anything's possible. I do believe Incyte does sell for a lot less than it would command on a takeover, or it should on its own drug franchise. So I bless the purchase after we get the natural profit-taking I expect after today's run off the Bristol deal.
I want to reiterate that the notion that I am now a bear, or that I am bearish, doesn't really capture where I am going here. I think the market, particularly the Nasdaq, is due for some profit-taking, exacerbated no doubt by tax payments that must be made in a couple of weeks.
All that said, though, my bottom line is, I am looking for bargains and I want the market to give them to us. I'll wait to get better prices. If I don't get them? Then I was too cautious. That's always a possibility, but after such a strong start to the year, please don't mind me if I want to get a little picky before I suggest the trigger be pulled.
