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Strength and Weakness of the Market | Cabot Weekly Review

In today’s market video, Emerging Markets Investor Chief Analyst Paul Goodwin looks at the rebound in the market and see both strength and weakness. There is a strong leadership group in the market and those stocks are in fine shape. But there are also a ton of stocks that are still trading below their 200-day moving averages. Yes, the percentage of stocks is up from the August and September troughs; but it’s still pretty high. The strength of the market tells me it’s time to do some buying, but the weakness below the surface leads me to recommend leading large-caps that trade on plenty of volume. And Paul wears his Halloween tie!

Transcript of Stock Market Video October 30, 2015

Hi, I’m Paul Goodwin, Chief Analyst of Cabot Emerging Markets Investor and this is the Cabot Weekly Review. It’s been pretty good week in the market, but this is what I would call a “yes, but” market.

People would say the market is doing well, but take a look at the S&P 500 here. What you see is after the big August 24th wash out then retest in September, the market has come ripping back. So, yes it’s above its 25-day and 50-day moving averages, which means the market is doing well. But 36% of stocks in the New York Stock Exchange are under their 200-day moving averages; if you look back on August 25, only 16% of stocks were above their 200-day moving averages. So, yes 36% is not great, but it’s a heck a lot better than 16.

Look at the NASDAQ: on August 24, 24% of stocks on the NASDAQ were above the 200-day. On the retails, it went down to 23% above. Now, stocks are 35.8% above their 200-day moving averages. The numbers themselves are not great, but the improvement in the numbers I would say probably is.

So, what has happened? I think all that has happened is that investors have just gotten used to the idea that yes, the FED is going to raise interest rates some time. I think that’s pretty much written in stone whether it happens by the end of the year or not. I don’t think investors really care very much. Investors understand that China has certain challenges to its economy and its growth may not be all that strong. That’s priced into the market now and I think there are plenty of stocks to look at.

But I don’t think it’s the time to be jumping into the market with both feet. The Cabot growth investing way when the market is positive is to move into the market progressively. If you make money, you keep going. If you don’t make money, you pull back and try to figure out what you’re doing wrong.

If you look at the emerging markets, they’re okay—right at the 25-day moving average and above the 50-day so that’s all right. If you look specifically at China, things are a little stronger and so we’re doing exactly what I said in Cabot Emerging Markets Investor: moving progressively to a little bit more invested each week and as long as we keep making money that’s what we’ll continue to do. I think it’s probably what you should do too.

Taking a look at some of the stocks we like now, I would say that it’s a good time to be in less risky stocks—what Mike Cintolo calls the liquid market leaders. These are stocks that have big institutional followings. They are extremely liquid and they will keep attracting investors. It’s possible that we may have narrowing leadership at the top of the market and if that’s true, then being in those stocks in that narrowing leadership group will keep your portfolio in just fine position.

Take a look at the weekly chart for Google (GOOGL) and you can see that this is not just long. This is protracted from late 2013 until just recently. Google has been pretty much taken for granted. Everybody knew what they did, but they just didn’t much care. But if you go back to the daily chart, you can see a nice gap up here on good earnings and another gap—and after this gap, Google trade sideways for a while, consolidates and then moves on again. I’m sorry, I’m calling it Google. It’s actually Alphabet because Google defined a new share class basically so the owners of the company can keep voting control—so it’s Alphabet, my bad old brain.

Same thing with Facebook. Everybody knows about Facebook (FB) and it’s extremely popular, but also everybody who’s actually following it knows that Facebook hasn’t really began to monetized Instagram yet so that’s why you get this kind of surge ahead on good volume.

This stock’s a little more controversial—it’s Alibaba Group (BABA). Everybody knows the story of how the stock came public and ran all the way up to 120. Even at the bottom, the PE wasn’t that low. People coming around to Alibaba now realize from its latest quarterly report that the Chinese consumers that everyone assumed would be tightening their purse strings because the Chinese economy wasn’t doing as well—turns out is just not the case. Revenues and earnings are both growing at excellent rates. And that has not just helped Alibaba stock; it has also helped stock of and VIPS and a bunch of other Chinese stocks. So, I just put the subscribers to Cabot Emerging Markets Investor back into Alibaba. It’s a big liquid leader. What’s not to like?

And here’s another one that everyone has heard of—the Alibaba of the U.S., Amazon (AMZN). Check this out, earnings gap, earnings gap, earnings gap and again the earnings gap—it appears to be picking up speed. Amazon has stopped making so much investment into infrastructure and is now actually deciding to make money, and everyone who looks at their cloud operation says they’re leader in that too.

So those are four liquid leaders that I really like. Then there are some that are little less obvious.

This stock is Netgear (NTGR). After a long period of just kind of getting tossed around, it takes off enormous volume here and when a company has a gap up on earnings like this, it frequently gives the stock a brand new lease on life and it does pretty well.

Here’s TripAdvisor (TRIP). This is the kind of stock action that you say, “Okay, let’s see here. Gaps up on earnings and then trails back down. Gaps up on earnings again, trails back down.” Gaps up on earnings here and so I guess it will be a great test for the theory that gap up on earnings gives a stock new energy. We’ll see, but you have to love the gaps.

Verasign (VRSN) is one in which that theory works pretty well. After the gap up here, it consolidates. It gets caught in the August meltdown and the retest and has since taken off so this is a great looking chart.

The jury is really out on Netflix (NFLX). Again, it’s extremely widely traded, widely known and generally widely loved, and has a long history of gapping up on earnings and then making further progress. After the August washout, it’s just kind of hanging around sideways. I would say, this is probably one to wait on.

This is a company whose story I think everyone here at Cabot is really high on: Zoes Kitchen (ZOES). Mediterranean food with sort of southern comfort style. It’s a cookie cutter story, so as they open more and more and more and more locations, it should do well. But you look at the stock and you have to say, “Well, if it’s so great why aren’t the investors getting into it?” Some people might want their analysis to trump what you see on the chart. That doesn’t happen at Cabot. If the chart doesn’t show it, we’re skeptical about it. So I think in the long run, it will probably do quite well, but we’re willing to wait until it’s doing quite well before we tell people to get into it.

So, that’s about it for this week. So, from spooky Salem, Massachusetts on Halloween, I hope you have a great Halloween, stay happy and with a great sugar rush and we’ll be back again with you next week. Thanks.

Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.