Issues
The market has begun 2019 with a bang, and it well could go on longer—though prediction is a fool’s game. It’s far better to simply follow proven systems of investing, whether growth or value or hybrid, and continually work to maintain a portfolio of high-potential stocks.
This week’s recommendation, for example, is a solid grower, nothing fancy. But the stock withstood the selling of December and is now at an attractive entry point, primed to break out to new highs in the weeks or months ahead.
This week’s recommendation, for example, is a solid grower, nothing fancy. But the stock withstood the selling of December and is now at an attractive entry point, primed to break out to new highs in the weeks or months ahead.
Current Market OutlookThe market’s rebound continues, and encouragingly, we’re seeing some power develop—stocks have shown two major accumulation days (one the day after Christmas, when the Dow rose 1,000 points, and the other last Friday after soothing words from the Fed) and breadth has been terrific. We can’t say we’re out of the woods yet; even after today’s rally, the intermediate-term trends of the major indexes are clearly down (all indexes are still near their 25-day moving average, in fact). But even so, there’s no denying the rally is off to a good start, and to this point, the market and potential leading stocks are doing what they “should” to carve out a sustainable low. You should still keep plenty of cash on the sideline, but we’re not opposed to adding some small positions in potential leaders and seeing how things progress. We’re nudging our Market Monitor up a notch.
This week’s list has a broad mix of stories and charts, but all of them look like they want to head higher if the market cooperates. Our Top Pick is Chipotle Mexican Grill (CMG), which, after a massive shakeout, looks primed to continue its turnaround.
| Stock Name | Price | ||
|---|---|---|---|
| AZUL (AZUL) | 29.41 | ||
| Buenaventura (BVN) | 16.23 | ||
| Chegg (CHGG) | 74.21 | ||
| Chipotle Mexican Grill (CMG) | 773.32 | ||
| Etsy (ETSY) | 112.97 | ||
| Incyte Corporation (INCY) | 76.98 | ||
| Kirkland Lake Gold (KL) | 51.30 | ||
| Okta, Inc. (OKTA) | 148.41 | ||
| Telephone & Data (TDS) | 35.36 | ||
| Workday (WDAY) | 194.88 |
Today’s stock is another specialized medical device company. It plays in the highly specialized market for organ transplant surveillance. It has all the attributes of a good stock—it’s expanding its end market potential with new products, is almost profitable, and the chart looks great!
Believe it or not, there are some legitimate reasons for hope as 2019 begins--the market’s December meltdown produced some historic extremes in sentiment and breadth, readings that have almost always occurred near the start of a bottoming process. If all goes well, the market will work in the weeks ahead to bang out a sustainable low, while the best stocks set up in pole position for the next advance.
I don’t see much downside risk for the market here but I do see a lot of upside, though the challenge is knowing which stocks are going to lead the next advance. Happily, one of the advantages of investing in a basket of stocks recommended by Cabot Stock of the Week is that you can own an extremely well diversified portfolio, which means that as the market’s bounce continues, you have a good chance of owning some of the leaders.
Amidst a bearish stock market, we’re adding one big-dividend stock to our portfolios today. Lacking much stock market excitement and lower-risk near-term capital gain opportunities, I decided to post some corporate news and price action on a couple stocks—not featured in our portfolios, but still of interest to many investors.
It is useful (if also humbling) to review how our prior year’s forecast turned out.
In this issue, we take a look back - and a look forward - as we assess our moves.
In this issue, we take a look back - and a look forward - as we assess our moves.
Current Market OutlookThe first three weeks of December were a complete disaster for the market, with most major indexes falling 16% to 19% during that time. The good news is that, after some historic oversold extremes (we saw three straight days of more than 1,000 stocks hitting new lows on both the NYSE and Nasdaq!), stocks have finally begun to bounce; ideally this upmove lasts for at least a couple more weeks and gives the market a low to work from, while some new leadership takes pole position for the next sustained uptrend. Still, as we have all year, we advise just taking things as they come—right now, the trends of the major indexes and the vast majority of stocks are pointed down (just 15% or so of stocks are north of their 200-day lines), so we’re sticking with a defensive stance and waiting patiently for the bulls to make a stand.
That said, we’re still seeing a good number of resilient ideas, including many with great growth stories. If you’re looking to nibble, our Top Pick this week is Planet Fitness (PLNT), which has a unique, independent growth story that continues to attract big investors.
| Stock Name | Price | ||
|---|---|---|---|
| Alteryx (AYX) | 132.78 | ||
| Atlassian (TEAM) | 182.16 | ||
| Broadcom Limited (AVGO) | 266.26 | ||
| Crocs (CROX) | 0.00 | ||
| Deckers Outdoor Corp. (DECK) | 141.68 | ||
| Elastic (ESTC) | 86.17 | ||
| Planet Fitness (PLNT) | 0.00 | ||
| ServiceNow (NOW) | 341.86 | ||
| Tencent Music Entertainment (TME) | 18.41 | ||
| Zscaler (ZS) | 126.22 |
Updates
While flashier, more star-studded teams like Lionel Messi’s Argentina, Kylian Mbappe’s France and Erling Haaland’s Norway garnered most of the headlines at the just-completed World Cup, Spain was the best team. There was nothing flashy about Spain: no mega-stars, not a ton of goals, no relentless attack. Instead, they dominated the tournament with precision passing, immaculate ball control and near-impenetrable (just one goal allowed all tournament!) defense.
The market rolls sideways amidst a slew of conflicting forces.
The S&P 500 has bounced around and is at the same level it was in the middle of May. The primary culprit is technology. That sector has been in a funk. The S&P 500 is hard-pressed to generate any lasting traction while this massive sector, accounting for over 40% of the index, flounders.
The S&P 500 has bounced around and is at the same level it was in the middle of May. The primary culprit is technology. That sector has been in a funk. The S&P 500 is hard-pressed to generate any lasting traction while this massive sector, accounting for over 40% of the index, flounders.
The market has gone sideways since May. It seems to be deciding what to do.
It’s encouraging that the resumption of hostilities with Iran has not sent the market lower. It’s also positive that oil prices aren’t rising back to the $100 level earlier in the war, although prices have risen. It’s also another earnings season and analysts expect a big one.
It’s encouraging that the resumption of hostilities with Iran has not sent the market lower. It’s also positive that oil prices aren’t rising back to the $100 level earlier in the war, although prices have risen. It’s also another earnings season and analysts expect a big one.
With war being one of the most dominant themes of the last four years, it stands to reason that investors should position their portfolios to account for this conspicuous (and unwelcome) trend.
And lest one be tempted to think that the warfare theme will diminish anytime soon, last week’s article by NPR deflates that illusion: It revealed that global military conflicts are at their highest level since WWII.
And lest one be tempted to think that the warfare theme will diminish anytime soon, last week’s article by NPR deflates that illusion: It revealed that global military conflicts are at their highest level since WWII.
Price targets are standard practice on Wall Street. But sometimes, they can act as an artificial ceiling.
For example, say Truist sets a price target on an up-and-coming growth stock that’s 25% higher than its current share price. For a growth stock, a 25% return isn’t much. But then again, the stock could be a total flop, which is the natural boom-or-bust tradeoff growth investors must endure in trading off increased risk for massive upside. So, a price target on a growth stock seems almost like an unnecessary cap on a stock that has the potential to go through the roof.
For example, say Truist sets a price target on an up-and-coming growth stock that’s 25% higher than its current share price. For a growth stock, a 25% return isn’t much. But then again, the stock could be a total flop, which is the natural boom-or-bust tradeoff growth investors must endure in trading off increased risk for massive upside. So, a price target on a growth stock seems almost like an unnecessary cap on a stock that has the potential to go through the roof.
WHAT TO DO NOW: Continue to trim your sails. In the Model Portfolio, we’ve been getting closer and closer to shore as growth funds and indexes are under pressure and AI stocks cascade lower. Tonight we’re going to further trim Marvell (MRVL) given its ugly action, selling a third of what we have left. That will leave the portfolio with a big 58% cash position. We could put some of that to work if growth names find support, but we want to see key growth measures firm up before buying.
After a brief pause last week, small caps are once again leading the pack.
Through Wednesday’s close, the S&P 600 Small Cap Index is up roughly 21% year to date, compared to gains of about 15% for the S&P 400 MidCap Index, 17% for the Nasdaq and 11% for the S&P 500.
Through Wednesday’s close, the S&P 600 Small Cap Index is up roughly 21% year to date, compared to gains of about 15% for the S&P 400 MidCap Index, 17% for the Nasdaq and 11% for the S&P 500.
Its earnings season again! That’s a good thing. Earnings just might save the day in an otherwise confusing and uncertain market.
The market is causing whiplash. The Iran peace deal changed things. Stocks held back by high oil prices, and the resulting higher inflation and interest rates, reignited as oil prices came back down after the peace deal. But hostilities with Iran have resumed.
The market is causing whiplash. The Iran peace deal changed things. Stocks held back by high oil prices, and the resulting higher inflation and interest rates, reignited as oil prices came back down after the peace deal. But hostilities with Iran have resumed.
The peace deal may be on hold again. But stocks are hanging in there so far.
The ceasefire with Iran is over and hostilities have resumed. That sounds like a bigger bummer than it’s been in the market so far. Falling oil prices enabled previously beleaguered stocks to soar higher again as the prognosis for inflation and interest rates simultaneously improved. But that rally is over if oil prices spike higher again.
The ceasefire with Iran is over and hostilities have resumed. That sounds like a bigger bummer than it’s been in the market so far. Falling oil prices enabled previously beleaguered stocks to soar higher again as the prognosis for inflation and interest rates simultaneously improved. But that rally is over if oil prices spike higher again.
It’s no surprise that summer often brings lower market volatility levels as Wall Street heads to the Hamptons and participation rates diminish.
Indeed, what we’re seeing right now has all the classic symptoms of a low-participation environment, with investor sentiment being remarkably muted. This can be seen across a number of sentiment indicators for several different markets, most of which are flashing decisively “neutral” signals.
Indeed, what we’re seeing right now has all the classic symptoms of a low-participation environment, with investor sentiment being remarkably muted. This can be seen across a number of sentiment indicators for several different markets, most of which are flashing decisively “neutral” signals.
The divide between value and growth stocks is widening, as the Nasdaq is now more than 5% off its highs after peaking in early June while the Vanguard Value Index ETF (VTV) is hovering near its late-June apex and is up 3% in the last month.
That can flip in an instant, of course, as we saw in April and May. But the bottom line is that value stocks have risen 15% year to date, compared to an 11% gain in the Nasdaq and a 9.5% boost in the S&P 500.
That can flip in an instant, of course, as we saw in April and May. But the bottom line is that value stocks have risen 15% year to date, compared to an 11% gain in the Nasdaq and a 9.5% boost in the S&P 500.
After a very strong run from the March lows, the market appears to be going through an uncomfortable but healthy rotation. Many of the biggest winners from the AI and semiconductor trade have come under pressure, while value stocks, equal-weight indexes and other areas that had lagged earlier in the year have held up much better.
Alerts
Today we’re adding a managed healthcare operator to the Buy Low Opportunities Portfolio.
The top five holdings of this real estate fund are: Lennar Corp (LEN, 5.51%), Land Securities Group PLC (LSGOF.L, 5.49%), Weyerhaeuser Co (WY, 5.44%), Global Logistic Properties Ltd (GBTZF.SI, 5.25%) and Cheung Kong Property Holdings Ltd (CHKGF.HK, 5.14%).
The price of one of our stocks has dropped to one-sixth of its yesterday close and is now trading around 29. The move is the result of a change in the ratio of native shares to ADR shares.
Although this Mexican cement company’s earnings climbed by 41% in its latest quarter, the stock has taken a hit on weaker cash flow numbers.
I’ve seen some unsettling action in a few of our stocks, I think we need to make a few small adjustments.
One of our stocks reported results this morning that beat on revenue and slightly missed on EPS.
This building products company beat analysts’ estimates by $0.12 last quarter, and 21 analysts have increased their forecasts in the past 30 days.
We’ve had a small pullback in the U.S. stock market averages. It’s a little too early to tell if they might fall further, which could easily happen if the recent increase in hostility that’s coming from North Korea continues to escalate.
The market suffered a major selloff yesterday; the Dow declined nearly 1%, the S&P 500 lost 1.5%, and the Nasdaq closed over 2% lower. I’m not entirely surprised, there have been red flags popping up under the surface of the market for weeks, as discussed in our regular updates.
This emerging market stock took off yesterday, after a great earnings beat.
While the Dow Industrials put on a good show in recent weeks and grabbed the headlines, many growth stocks struggled, as did the Nasdaq and small- and mid-cap indexes.
Portfolios
Strategy
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.