There’s been a lot going on since my last Cabot Wealth Daily, both on the news front and from the market itself—and I have a few thoughts about the near term, the intermediate term and some developing leadership. Let’s get right to it.
5 Thoughts on the Overall Market and Stock Ideas to Consider Now
1. While trees don’t grow to the sky, and it’s been a superb run for the market since the April lows, the odds continue to favor meaningfully higher prices when looking many months down the road—and I’m saying that not based on hunches or hopes, but on historical patterns. Consider that the S&P 500’s five-month rate of change recently hit 30%, which has been seen just a few other times in the past six decades, all coming off major lows. (Shown below is the last time this happened, in August 2020.) Looking at those prior instances, the average maximum gain for the S&P 500 during the next six months, after the big move, was another 17% gain. Obviously, that’s just one study, and, besides, there are no guarantees in the market, but combined with other big-picture positives (like lukewarm long-term sentiment), the odds favor this bull run continuing for months to come.
2. Another positive that I mention in most all of my weekly videos is the fact that, while the under-the-surface action can be tedious with lots of rotation and chop (selling on strength is common out there), I find it very encouraging that there’s been no rush into defensive stocks—maybe the money flows into growth, maybe it’s into cyclicals or financials or what have you, but big investors haven’t shown any desire to “hide” in things like toothpaste and toilet paper makers. Indeed, take a look at the Consumer Staples fund (XLP)—not only is it lagging the market, it’s actually falling sharply, hitting its lowest levels since April this week. It’s a good sign that institutions still have a risk-on mindset overall.
3. However, while the long term looks great, the near term is much more up in the air, which isn’t a huge surprise given the elongated intermediate-term run the market has enjoyed. Headwinds include elevated near-term sentiment (Investors Intelligence weekly survey is as stretched as it’s been since before the March/April crash; a persistently low Volatility Index for the past two months usually leads to a period of weakness, etc.); the calendar is unfavorable (late September is the worst part of the calendar year for the market, for whatever reason); and, of course, the market’s own action, as the big-cap indexes have marched higher since Labor Day and are extended to the upside after a five-month run. I’m more of a position (intermediate- to long-term) trader, so I’m not selling because of this—but being selective on the buy side, raising stops and/or booking partial profits on extended names and holding a little cash seems prudent. Indeed, this week’s dip could be the start of a bigger retrenchment phase, and a dip to the 50-day line (or maybe even a bit below) can’t be ruled out.
4. One of the big challenges for growth investors this year is that, while AI infrastructure—including some chip names, networking, power, storage, etc.—has been hot, lots of other growth areas like medical, growth-y retail, much of cybersecurity, cloud software, most crypto, most aerospace suppliers and payments didn’t do much after the initial May-June rebound from the spring market selloff. However, finally, we’re starting to see some fresher leadership outside the AI sector emerge: Medical and biotech names have finally perked up after months of choppy action—Argenx (ARGX; Vyvgart is a product in a pipeline pushing results much higher), GeneDX (WGS; leading the way in genome/exome testing with big potential in children) and Madrigal Pharma (MDGL; Rezdiffra is a blockbuster for a relatively widespread liver disease) are three names to watch that have all recently emerged from multi-month rests. In software, a name like MongoDB (MDB), a new-age database outfit, has chilled out after a monstrous bullish earnings gap last month; and in the online realm, a name like Reddit (RDDT), the popular social media platform, is in good shape despite some hacking up and down during the past month.
5. And while growth is my personal bailiwick, I’m also seeing a fair number of fresher things emerging or setting up in the broad market. I think these types of stocks will be more news-driven by macro factors (especially economic reports that shift views of future Fed rate cuts), but they look ready to head higher if all goes well. Two ideas: United Airlines (UAL) acts well, trading near its pre-tariff-slump highs; earnings here have remained elevated for years and analysts actually see the bottom line lifting to nearly $13 per share next year, up 23%. There’s also Construction Partners (ROAD), a traditional infrastructure player that’s growing both organically and through M&A, with earnings expected to leap 63% this year and another 41% next as margins boom—after no net progress for nine months, the stock is freewheeling on the upside and should continue higher if things go according to plan.
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