Over the last several months, there has been the beginning of a cautionary trend: big leader gap downs. Today, Gilead Sciences (GILD) is gapping down over 10% on heavy volume. This was due to news that Express Scripts decided an AbbVie drug will be its exclusive option for testing Hepatitis C. On 12/9/2014, Spirit Airlines (SAVE) gapped down 12% following disappointing guidance from the company for Q4 2014 and Q1 2015. Finally, Netflix (NFLX) gapped down almost 20% on 10/16/2014 following its Q3 2014 earnings release.

 

Even though the general market is near new highs, caution is important even though the current market status is at “market in correction.” These types of gap downs illustrate an ever-present danger in the market that could have implications going forward. Typically, when leading stocks are hit hard, it could be a sign of a topping market if new leadership isn’t there to fill the void. It is also important to discern the difference between company-specific news and overall industry rotation. In the example of SAVE, while the stock was hit particularly hard, most other airline stocks have rallied back to their 52 week highs.

 

With respect to portfolio management, if you start to see more of these dramatic drops in leading stocks, then incrementally pulling out of selected positions would be a prudent decision. Should the markets continue to deteriorate, it would be sensible to scale back all your positions even more. 

 

Best Returns,

The MarketSmith Team