Give me your tired, your poor, your huddled masses. Give me your beat down, your volatile, your Zacks Rank #1 (Strong Buy) and Zacks Rank #2(Buy) stocks that have been brutalized by the injustice of a heartless market blind with anger. I will help you pick up the pieces after this recent spat of volatility and uncover stocks than stand to gain the most on a recovery.
But first, let’s take a look at just how nasty things got. While the S&P 500 is a broad measure of the market, it’s the Russell 2000 index that paints a more accurate picture of the carnage. The recent chart is the closest thing I’ve seen to Picasso’s Guernica in quite some time.
It’s been said that stocks take the escalator up and the elevator down. It certainly seemed that way today. Using the Russell 2000 as our proxy, look at how today’s sell-off engulfed the bullish action what we had seen over the last couple of days. After yesterday’s Fed minutes release it appeared that the bulls reestablished their control of the market. This morning from the jump the market stood in and screamed a resounding “No” directly in my ear.
Thursday’s candle on the Russell 2000 completely encompassed yesterday the day before, and the day before that. We’ve also got the third in a series of lower tops and lower bottoms. None of this spells technical strength right now. If fact, it all says “BEARS” louder than Soldier Field Sundays.
That’s the short term view of things though. That’s what the pulse of technical analysis is saying right now. That fickle vixen. That hussy. That Jezebel. That cruel mistress we call the market. Now part of the reason I zoomed out on this chart is I want to put today in the grand scheme of what’s happening. We’ve had one heck of a run up to this point. And if I were a big institution wanting to shake monkeys off the tree, push the small hands aside, this is exactly what I would do. I would give you a sharp, violent down day like today to make you tuck tail and run.
I drew a few Fibonacci levels here based on two different moves. One using the big move from November 2012 to the top and the other from the recent lows of this past February. Looking at the longer move first, we haven’t even pulled back to the 23.6% level. That indicates the long term bull trend is still very well intact. Even a 38.2% retracement would maintain this trend. We are very far from these levels.
Now on the shorter timeframe the 50% retracement provided support on March 27th and then the 61.8% on Monday. Today we broke below and, more importantly, closed below this level. The next step down is the 76.4% level down around 1113. The 23.6% level from the big move is camped out just below there. When you can match up Fibonacci levels from different reference points you have what’s known as a confluence of support. That’s got to be the floor. I can hear my old broker buddies yelling “LOAD THE BOAT!”
After the forest fire the market just went through we’ve got to search for saplings peeking their heads out in little green sprouts on the ground. I’m looking for stocks that had done very well this year or the end of last year that are Zacks Rank #1(Strong Buy) or Zack Rank #2 (Buy). The thought process is we are looking for the babies thrown out with the bath water. Stocks whose fundamental earnings story hasn’t changed, just their stock price. We are digging through the clearance rack looking for the half-off stickers on the Bruno Magli’s. Using Zacks Research Wizard I found three stocks we may be able to stand in and buy with a little courage.
Astronics (ATRO - Snapshot Report) is a manufacturer of specialized lighting and electronics for the cockpit, cabin and exteriors of military, commercial transport and private business jet aircraft. ATRO is insulated within the aerospace and defense equipment industry that ranks in the top 31% of our Zacks Industry Rank. Currently, ATRO is a Zacks Rank #1 (Strong Buy).
The earnings story has been strong for ATRO for most of the last four years, with one major rough patch coming in 2012. Since then year over year numbers have improved and earnings estimates have continued to be revised to the upside. The price and consensus chart below shows the story of earnings over the last several years.
The technical picture may be turning a corner for ATRO. Usually I look for stocks trading above their 25 day moving average shifted by 5 days (25x5) that are firmly in uptrends. Here we have a stock that has wavered with the market quite a bit. Remember, we have a Russell 2000 index that has sold off pretty violently lately. It appears that ATRO is catching a slight bid above support from the lows of late February. The last time ATRO caught support and turned around it stormed up from around $50 all the way up above $72. Even a retrace back to the 25x5 at $65.52 would be a good jump from where the stock is trading at today.
Another good idea to look at is Dixie Group (DXYN - Snapshot Report). Dixie is a leading carpet and rug manufacturer and supplier to higher-end residential and commercial customers. Here you get a stock that has a housing turnaround story behind it. If we get increasingly better new home starts numbers that should bode well for companies that provide materials for these new houses. And nothing screams new house like a fresh carpet under your feet.
Recent earnings surprises are a big reason why DXYN is a Zacks Rank #1 (Strong Buy). Over the last four quarters they have surprised to the upside by an average of 184.59%. Last quarter’s surprise beat the 5 cent estimate by 9 cents. Current year earnings are slated to come in at 72 cents per share while next year’s target number is $1.05. The price and consensus chart shows a clear up and to the right pattern that we all love to see in a stock. It seems that the earnings story turned around as volume started to pick up in early 2013.
The technical interaction DXYN has with its 25x5 is very encouraging. Often time price dips and closes below for several days then catches a bid once again and pushes higher. Not only is this happening again today, but it is finding support just above the $15 level. I think this is a pretty good risk versus reward scenario shaping up for the stock.
Last but not least we have Synutra International . Synutra is a Zacks Rank #1 (Strong Buy) in the dairy products industry that ranks in the top 11% of our Zacks Industry Rank. SYUT owns and operates six subsidiaries in China that are all engaged in different stages of production, distribution and sales of dairy based infant and nutritional formulas. Similar to DXYN, Synutra has had a great track record of beating earnings estimates to the upside. The last four quarters they have beat by 125% on average.
The chart for SYUT shows a stock that had a huge breakout to the upside and has pulled back considerably. This is the perfect technical set up for us to use Fibonacci retracements to identify potential areas of support for the stock on the way down. I know you never want to try to catch a falling knife so you definitely want to wait to see confirmation of the support prior to entering any trade.
If you take the move from the lows in July 2013 to the highs of November 2013 and draw several key levels you can see that the stock is very near the 76.4% retracement level today. This could very well be the bottom and a support level for SYUT. This is the same price level where the stock found resistance in June 2013 before it began its big move to $10. If the Russell finds support down here at the 1113 level maybe this stock can catch a bid and get back to the $7’s.