Companies below the AI mega stories continue to face headwinds such as higher energy costs, higher interest rates, and higher Mideast tensions and geopolitical risks.

Below the radar, a fair number of S&P 500 companies and small-cap stocks have already pulled back as much as 10%-20%, and some even more. This is bringing valuations more in line with earnings expectations, which could reverse trends. The election two weeks off will have an impact. Next week, we will review quarterly earnings reports from several Explorer positions.

The October issue of Cabot Early Opportunities arrives after a significant shakeout in some of the market’s most popular stocks. That volatility has created a wonky environment, but it also reinforces the value of looking beyond the usual suspects for fresh opportunities.

This month’s issue features three such off-the-beaten-path names: a software company participating in a broad industry recovery, a profitable biotech delivering exceptional commercial growth and a newly public professional-services company combining strong organic execution with an aggressive acquisition strategy.

Let’s get to the details.

Coming out of October expiration, we had two positions expire for full profits (RNG and ZETA) and two positions in which our calls expired worthless, leaving us with our stock positions today. We will sell our FIVN stock/trade for a profit today, while we will take a loss on HPE.

To execute these trades you need to:

Sell FIVN Stock

Sell HPE Stock

Moving on …

A few growth themes and an increasing number of stocks looked ready to get going, but the sellers began to step up two weeks ago and, last week, definitely caused some abnormal action. To be fair, that doesn’t necessarily portend doom: We’ve seen a bunch of these rotations in the past year and the fact the broad market has perked up could provide some opportunities. But the take down of potential leadership wasn’t what we were looking for—our Market Monitor stands a level 6.

This week’s list obviously has more of a variety of names given the selloff in growth areas. Our Top Pick is a little known biotech that sports great growth and big potential—and the stock is actually attempting to break out on good volume.

Chip stocks are up, defensive stocks are down, and market rotation is in full swing. Will third-quarter earnings season, which really gets going this week, lift all market boats … or sink them? I’m betting the former, but in the meantime, it remains a stock picker’s market. Fortunately, you’ve come to the right place. This week’s newest addition comes from Michael Brush, Chief Analyst of Cabot Insider Edge, who just recommended a little-known fintech that just attracted an eye-popping amount of insider buying – typically a very bullish sign.

Details inside.

The “AI reckoning” came roaring back last week as worries over the mountain of debt being used to fund the AI buildout, highlighted by CoreWeave (CRWV) bonds trading at levels that typically signal distress, sent chip stocks lower for eight straight sessions, their longest losing streak since 2008. Adding fuel to the fire, a hotter-than-expected September CPI report (consumer inflation) on Wednesday and an even hotter PPI report (producer inflation) on Thursday put an October rate hike back on the table. The result was the Nasdaq’s worst week since June, though the Dow quietly notched its second straight weekly gain as money rotated out of tech rather than out of stocks altogether.

The “AI reckoning” came roaring back last week as worries over the mountain of debt being used to fund the AI buildout, highlighted by CoreWeave (CRWV) bonds trading at levels that typically signal distress, sent chip stocks lower for eight straight sessions, their longest losing streak since 2008. Adding fuel to the fire, a hotter-than-expected September CPI report (consumer inflation) on Wednesday and an even hotter PPI report (producer inflation) on Thursday put an October rate hike back on the table. The result was the Nasdaq’s worst week since June, though the Dow quietly notched its second straight weekly gain as money rotated out of tech rather than out of stocks altogether.

The “AI reckoning” came roaring back last week as worries over the mountain of debt being used to fund the AI buildout, highlighted by CoreWeave (CRWV) bonds trading at levels that typically signal distress, sent chip stocks lower for eight straight sessions, their longest losing streak since 2008. Adding fuel to the fire, a hotter-than-expected September CPI report (consumer inflation) on Wednesday and an even hotter PPI report (producer inflation) on Thursday put an October rate hike back on the table. The result was the Nasdaq’s worst week since June, though the Dow quietly notched its second straight weekly gain as money rotated out of tech rather than out of stocks altogether.

The evidence was growing more encouraging into the end of September, but the selling since then has been powerful, with our Aggression Index quickly turning negative and many potential leaders falling apart. We’re glad we had half the portfolio in cash coming into today, and we trimmed two positions (our two largest) on a special bulletin this morning in response. That said, it’s not 2008 out there, and we remain flexible should this turn into the final shakeout of a grinding few months--but for now we favor caution as we see how the downmove plays out.

Troubling developments after Labor Day plunged most stock prices lower. But an opportunity is emerging.

Sure, the S&P remains close to the high despite high oil prices and interest rates. But that is mainly due to the solid performance from just a handful of big technology companies, which have an outsize weight on the S&P index. Most stocks are taking a beating. As of last Friday’s close, 84% of S&P stocks were down at least 10% from the high.

But there is good news on the horizon. The economy is strong, as evidenced by last quarter’s 50%-plus earnings growth rate. Analysts are expecting continued strong growth in the next two quarters and into next year. In fact, the Atlanta Fed expects GDP growth of 5% in the third quarter, the strongest growth since the pandemic recovery. Plus, the Middle East situation is likely to be resolved at some point, and oil prices could come down hard.

Therein lies the opportunity. Certain stocks that got bludgeoned by the recent high oil prices and interest rates also stand to benefit mightily in a strengthening economy with lower oil prices. These stocks have gotten cheap ahead of an environment in which prices are likely to rally.

In this issue, I highlight several portfolio stocks that stand to benefit as a new environment unfolds in the months ahead. These stocks are selling at the lower end of the recent range and pay elevated yields. It’s not the time to fret about what has already happened. It’s time to prepare for what is likely to happen next.

The stock market and the bond market spent last week telling two very different stories. The 10-year Treasury yield pushed to its highest level since 2002 early in the week, yet the S&P 500 still managed its first record close since August on Tuesday as oil briefly dipped below $100 and yields eased. Wednesday’s Fed minutes showed most officials still see another rate hike as likely by year-end, and Thursday’s tech selloff knocked the Nasdaq lower before a broad Friday rally left the S&P 500 just shy of its record.

Most of what we wrote last week remains true, and so we’re optimistic not only that the next big move is up, but that some names could start to run soon. That said, we are watching defensive stocks, which have started to outperform, with things like consumer staples and low-volatility titles pushing higher as the Nasdaq and other growth areas still see a lot of selling on strength. Another few days of this type of action could be a yellow flag, but we always go with what’s in front of us—and we’re OK starting some new positions in strong names given the overall action. We’ll leave our Market Monitor at a level 7.

This week’s list has a variety of stocks acting well. Our Top Pick is a chip equipment player that has great growth projections and has shown intriguing strength. We’ll look to enter if the stock recovers from the recent group-related pullback.

October has deservedly earned its spot as one of the calendar’s most feared months for investors. Characterized as it often is by abnormally high volatility, fear-laden news headlines and, in midterm election years, the added headwind of political angst, the term “October Effect” aptly describes the month’s tendency for self-fulfilling selling pressure to be seen across the market.

WHAT TO DO NOW: Remain cautious. It’s not 2008 out there, but growth stocks remain mostly under pressure and even the market as a whole is iffy—our Cabot Tides and Aggression Index remain negative. We cut back some last week off an already-large cash position, and we’ll stand pat tonight with around 63% on the sideline.

In my near-constant search for the next stocks to add to our Cabot Value Investor portfolio, a useful screening tool I use is courtesy of finviz.com, short for “Financial Visualizations.” There, I screen for stocks with low price-to-earnings and price-to-sales ratios, with high earnings growth – typically north of 10% expected EPS growth in the current fiscal year.

Right now, a simple search using those parameters brings up a whole lot of banks.

We may finally be seeing a little evidence of the small-cap rebound we’ve been waiting for.

From last Wednesday’s close through yesterday, the S&P 600 SmallCap Index gained 1.8%, versus a 0.5% gain for the S&P 500. While we don’t want to read too much into one week’s outperformance – and this morning’s early market action is a reminder that we’re not out of the woods yet – the direction is mildly encouraging.

Oil prices and interest rates are still sky high. Most stocks are struggling as a result. But help is on the way. Its earnings season again.

The market is getting a reprieve so far this week after the chip stock selloff last week. But things are still frog-ugly under the hood. Although the S&P 500 index is still within 2% of the high, most stocks are getting clobbered. About 60% of S&P 500 members are down 20% or more from the high. Main Street companies don’t like high prices and high interest rates.

The market is getting a reprieve so far this week after the chip stock selloff last week. But things are still ugly under the hood.

The S&P 500 is still hanging tough within 2% of the high despite high oil prices and interest rates. The benchmark 10-year Treasury rate remains well above 5%, near the highest level in more than 20 years, and the price per barrel of oil has moved over $100 again. But the S&P index is being buoyed by just a few huge technology stocks while this environment is taking a toll on most stocks.

Experience teaches that shareholder activism is an extremely important corollary of the turnaround investing process. We’ve all seen how an activist campaign on the part of a major shareholder—be it a hedge fund or a dedicated activist firm—can serve as a catalyst or an accelerant for the success of a troubled company’s rebound efforts.

Spooky season rolls on, with dual jump-scares on Wednesday of another overheated inflation reading (September CPI data came in at 3.7%) and a couple of high-profile earnings misses (I’m mostly looking at you, Bank of America (BAC)) to get this pivotal third-quarter earnings season off to a somewhat ominous start.

October is often a trick-or-treat kind of month for stocks, especially in an election year like this one. But the “trick” part of the month usually comes in the first half; the second half – as I wrote in this space last week – is where many a major rally has begun, including a couple in recent years.

The S&P 600 continues to try to firm up around its 200-day line and build a base off which a potential recovery could take shape. But we need interest rates to chill out for that to happen.

With this week’s inflation readings (CPI and PPI) both coming in hotter than expected, speculation about the Fed’s next move is ramping up. There is currently a 71% probability of the Fed holding steady at the October 28 meeting.

The Bureau of Labor Statistics reported yesterday that overall prices rose 0.6%, or an annualized rate of 7.2%, in September. Compared with the same time last year, prices were 3.7% higher. This led to tech stocks and small-cap stocks selling off as the probabilities of higher interest rates rose.

The stock market and the economy now face significant challenges. So, it is no surprise that most stocks are in a bear market, or at least a correction. When the market is in a steep sell-off like this, it is tough to know when it will bottom.

I know what you are thinking: “What bear market? The S&P 500 keeps hitting new highs.”

This is true. But it is only part of the story.

Before this morning, the S&P 500 had firmed up near recent highs thanks to impressive performance from many of the Mag. 7, including portfolio position Microsoft (MSFT), which is knocking on the door of a fresh all-time high. Meta (META) has also been a big contributor to recent Mag. 7 outperformance.

Today, a whopping eight Profit Booster positions will expire. Most are “slam-dunk,” full-profit trades, while others will go down to the wire.

The big takeaway, before we dive in, is we are going to let the situation play itself out, and come Monday/Tuesday of next week we will revisit our profits, as well as how we will manage the remaining positions.

WHAT TO DO NOW: Take another step closer to shore. Growth stocks have taken a sharp turn for the worse, with our Aggression Index quickly turning negative and, just as important, many potential leaders cracking intermediate-term support. We’ve been 50% in cash for weeks, and today we’re going to raise that a bit more, selling one-third of our stakes in both Dell (DELL) and ProShares S&P 500 Fund (SSO), while also placing Snowflake (SNOW) on Hold. We’ll have further details in our issue tonight.

McKesson Corp. (MCK) has reached our 950 price target, and with the stock now trading above its five-year average valuations on both a forward earnings and price-to-sales basis, it’s time to

Nike (NKE) released fiscal Q1 2027 (ended in August) earnings that missed Wall Street’s expectations on the top line, but were in line with the company’s expectations.

We’re taking two actions today.

Sell ATI (ATI)

A few Cabot Options Trader subscribers have asked me about ways to protect gains in their portfolios, so I thought I would write to everyone with a couple of strategies using options to hedge your portfolio.

A subscriber recently asked me if I keep a journal of my trades. Many traders keep journals so they can look back at their trades and evaluate what they did right and what they did wrong.

Want to know how the big institutional investors use options? Here is an example of how one trader spent $132 million on three technology stocks.

Options trading has its own vernacular. To know how to do it, you need to know what every options term means. Here are some of the basics.

Our Cabot Momentum Trader’s market timing system consists of two parts—one based on the action of three select, growth-oriented market indexes, and the other based on the action of the fast-moving stocks Cabot Momentum Trader features.