Not to repeat a message I’ve been saying for the past couple of months, but from a big-picture perspective, I remain extremely bullish. Having been at Cabot for more than a quarter century (and with the grey hairs to prove it), you don’t see this kind of setup we have today very often.
From a huge selloff with panic selling to mundane-to-bearish big-picture sentiment (check out the latest Schwab Trading Activity Index, which shows its clients aren’t very risk-averse relative to the past many years) to unusual strength in May and June (Three-Day Thrust in May; 20% gain in two months triggered in June), all of these factors have a great history at leading to big gains over the next six to 12 months, if not longer.
Throw in some broad fundamental positives, like the AI revolution and the growing possibility of Fed rate cuts, and the odds strongly favor the next major move still pointing higher.
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However, in recent weeks, the market has gotten a lot iffier. “Mike—what are you talking about? The S&P 500 and Nasdaq hit new highs this week!” True, but not much else is: Since the start of July, the advance has become very narrow, not just with the growth stocks that I focus on but with most everything out there.
Indeed, take a look at the equal-weight funds for both the S&P 500 (RSP) and Nasdaq 100 (QQQE)—these funds have the same percent in each stock (as opposed to the actual indexes, which are weighted to the biggest names). You can see that even among large caps, progress has stalled out; in fact, less than half the Nasdaq 100 members are even above their 50-day lines! Plus, while still small, we’re seeing the number of stocks hitting new lows on the NYSE (what we call our Two-Second Indicator) expand to near-term worrisome levels.
Usually, when you get multi-week divergences, things get back in gear in one of two ways. The first is bearish, where the big-cap indexes join up with the rest of the market— on the downside. Indeed, the last time we saw a consistent string of new lows north of 40 while the big-cap indexes were hitting new highs was last summer—just before a quick plunge into the August low.
However, there’s another, more pleasing option: The broad market kicks into gear to join the stronger big-cap indexes. In this scenario, you may see leaders see a couple of wobbles, but many areas, like small and mid-caps, can ramp. Interestingly, when the inflation report came in as expected this week, this was exactly what we saw, with the market flipping the script as the broad market ramped thanks to increased hopes of a Fed rate-cutting cycle.
Of course, a day or two doesn’t necessarily make a trend, but if we’re finally seeing more of the market kick into gear, it might pay to look beyond the much-talked-about AI stocks and look for opportunities in some other areas. A couple of ideas...
2 Stocks to Buy if the Broad Market Kicks into Gear
Granite Construction (GVA) isn’t the sexiest name, but it’s a big aggregates and construction player that’s benefiting from the building boom, and it has an active M&A strategy to roll up local players and grow its footprint. Long term, it’s targeting about 7% annual organic growth, and then M&A will add a kicker to that. The stock had a big run from late 2023 into late 2024, then built a gorgeous launching pad through July—but the Q2 report launched the stock to new highs. There will be dips here and there, but we think a sustained rally has begun.
A growthier play is Gene DX (WGS), which has a legacy medical testing business, but the big draw is its best-in-class DNA tests for genomes and exomes; it had the widest library of data in the sector, which is why 80% of geneticists use them, while pediatric neurologists and hospital NICUs are starting to ramp orders, too, all to help identify rare diseases more quickly and accurately. Genome/exome revenue should grow 50% this year on a 30% increase in orders, while earnings are booming. The stock is a bit crazy, but after a huge run last year, it had a big correction and rest period the past few months—but the Q2 report here also brought in some buyers, with shares marching back to their prior highs. Both GVA and WGS look primed to head higher.
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