Jacob Sonenshine

The stock market has rallied to a point that suggests investors have barely any concerns about the economic outlook. That means it could be time to sell lots of names.

The Russell 1000 index, which is essentially the S&P 500 plus another five hundred midsize to smaller companies, is up 18% from the low point it hit in early April in response to President Donald Trump's imposing higher than expected tariffs on most of the U.S.'s trading partners. The index, like most, is now above its level on April 2, the day of the announcement, though it is a bit more than 4% below the record high it hit in February.

The rebound has happened because Trump has temporarily backed away from both sky-high tariffs imposed on China and country-specific levies on other partners, though some import taxes remain in force. A major concern is that prices in the U.S. will take off, reducing demand from both consumers and businesses, hurting the economy and corporate earnings.

Although that inflation has yet to show up in the economic data, a hefty rise in prices would likely drag down stocks, which are above their pretariff levels. Most stocks are at risk of falling, so Jeff deGraaf, head of technical research at Renaissance Macro Research, looked for those that look like the best ones to sell.

He found that 11% of Russell 1000 stocks fit his criteria for an "optimal exit," which means anyone who has ridden recent gains should unload them. His rule of thumb is that a stock must look overbought from a technical perspective but still be in a longer-term downtrend.

The long-term downtrends in those stocks -- there are a little more than 100 of them -- indicate that most of them have performed poorly in terms of fundamentals, making them likely to falter, especially if the economy weakens. They are the opposite of high- quality companies, which can lift prices in response to tariffs without losing much demand, have high profit margins, and larger balance sheets. Lower-quality companies have more difficulty lifting prices, and their earnings are more at risk.

Among the stocks deGraaf highlighted were Celanese, a specialty materials company; Stanley Black & Decker; Teradyne, a maker of testing equipment for semiconductors; Skyworks Solutions, a semiconductor maker; NXP Semiconductors; Microchip Technology; and Xylem, a manufacturer of industrial products and systems.

Another is On Semiconductor, which exemplifies the type of stock deGraaf has highlighted. The stock is up about 41% to $44 from its April low, but down 58% from its July 2023 peak. It recently rose above its 50-day moving average of $40, but that makes it look overbought. Every time since it has risen a few percent above the average since that 2023 high, it has gone on to record double-digit declines.

According to FactSet, both earnings and forecasts for profits have been declining since 2022. A large chunk of its sales come from electric vehicle makers, which have seen slowing growth. Right now, there aren't many signs of improvement, making the stock look like a sell after its sharp rally.

There is also e.l.f. Beauty. Its stock is up 53% to $76 from its April low, but it has been in a downtrend since peaking at $217 in early 2024. It is a little above its 50-day moving average of $62. When it moves above that average in the past early 2024, it goes on to see double digit declines.

While e.l.f. Beauty had gained market share in lower-end makeup products for most of the 2020s, sales growth is slowing. The consensus call among Wall Street analysts for 2025 earnings has fallen hard since the middle of last year. Right now, the stock is likely to move lower before sentiment starts to improve.

Therein lies the opportunity for investors. Selling some of these stocks to raise some cash could be a smart move in what could easily be a shaky stock market.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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May 15, 2025 12:58 ET (16:58 GMT)

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