Before I dive into this morning’s Cabot Options Trader Weekly Update, I wanted to bring to your attention that the Mintz family will be traveling to Europe this Wednesday through the following Wednesday.

And while I will be offline in terms of trading, answering questions, and the Daily Order Flow list, I will keep a distant eye on our positions and if we need to act, I will send instructions.

After a very sharp dip for most major indexes and especially the Nasdaq, a bounce is underway. When looking at individual stocks, we’re fairly encouraged with what we see, which is a good sign that there will be leadership to sink our teeth into once this correction finishes up. But, at this point, we can’t conclude the correction is over, with most major indexes and key measures still buried under resistance (such as 50-day lines) and with formerly strong areas (chips, etc.) still looking suspect. We’re not opposed to a nibble here or there, but we continue to think remaining patient will pay off. We’ll move our Market Monitor up to a level 5, but still think keeping plenty of cash on the sideline makes sense.

This week’s list is chock-full of names that are acting great, most of which have recently shown big-volume strength after earnings, though we prefer to aim for dips in many cases. Our Top Pick is a familiar name that staged a classic earnings-induced breakout last week.

Calm has been restored to the stock market, at least for now. A week ago – when the VIX briefly spiked as high as 66(!) – it was the opposite of calm. So even if stocks don’t suddenly go straight back up again, this is a welcome return to pre-August form. With that in mind, we have no new sells or downgrades (several of our stocks are hitting new highs!), and we add a very normal-looking growth stock that’s been sailing along just fine despite the many headwinds of the last few weeks. It’s a recent recommendation from Mike Cintolo in Cabot Top Ten Trader.

Details inside.

The market’s pullback went over the falls late last week and on Monday, with panicky trading leading to a huge gap down--and possibly a short-term low. Overall, the evidence tells us the intermediate-term trend is down and that, even if we have bottomed, plenty of repair work will be needed. That said, the longer-term evidence is still positive and, frankly, we’re not having trouble filling up our watch list for potential fresh leaders. Long story short, we remain cautious here and hold lots of cash, but we’re not sticking our head in the sand, either, and could have a couple of small moves if the market continues to stabilize.

I have to admit, a couple of weeks ago, on our Cabot Street Check podcast, Chris Preston, host and Chief Analyst for Cabot Value Investor, and I discussed the possibility of a recession and I commented that I thought recession fears were mostly over.

Well, I’m going to reconsider that (a bit) after Monday’s 1,000+ point loss in the Dow. Last week’s jobs report came in at 114,000 jobs—considerably less than the 185,000 expected—spooking the markets and causing economic gurus to once again bring up the possibility of the dreaded “R” word. Additionally, the unemployment rate edged up to 4.3% and manufacturing and construction spending were also less than expected, furthering economic worries.

The dramatic decline in the stock market of the last couple weeks has pushed two of our positions through our stops. And because of that we are going to exit those positions …

Please note, S&P 500 futures are indicated lower by approximately 4.5% this morning, while the Nasdaq is looking down 5.5%. I go into some of the reasons why below.

Regardless of the reasons, I do not expect to buy or sell many positions today. Instead, as I’ve said for weeks as the trading action had become murkier, I continue to preach patience.

Moving on to our Week in Review …

Please note, S&P 500 futures are indicated lower by approximately 4.5% this morning, while the Nasdaq is looking down 5.5%. I go into some of the reasons why below.

Regardless of the reasons, I do not expect to buy or sell many positions today. Instead, as I’ve said for weeks as the trading action had become murkier, I continue to preach patience.

Moving on to our Week in Review …

It looked like the bulls were ready to put up a fight last Wednesday, but it’s been all down since then, lowlighted by today’s action. Stepping back, we have two thoughts: Short term, there was definitely some panic today, and the fact that we saw a solid intraday bounce (closed well off the lows) implies some sort of bounce is possible. That said, the sharp, straight-down action from the market peak less than four weeks ago tells us a good amount of repair work is needed even if we do bounce. In terms of actions, we haven’t been pushing the envelope for many weeks, so if you have a good-sized cash position, we wouldn’t necessarily sell wholesale. That said, you should honor most stops (simply holding everything and hoping isn’t advised) while remaining patient. We’ll drop our Market Monitor to a level 4 (from 6) given the damage.

This week’s list has a lot of proper charts even after the latest selling storm. For our Top Pick, we’re going with a well-situated biotech firm that popped on positive drug trial results that will dramatically expand the opportunity for the big-selling drugs already on the market.

It’s become a full-blown market correction. When will the selling stop? No one knows. But as always, when it does, there will be ample opportunities to make huge profits on the other end of it. In the meantime, we prune a few of our hardest-hit positions today and add a new position designed to capture growth in the fastest-rising economic power in the world, India. It’s a brand-new recommendation from Carl Delfeld in his Cabot Explorer advisory.

Details inside.

Going into last week we knew it had the potential to be a wild five-day stretch, and the market didn’t disappoint as the indexes swung violently, and sector rotation was intense. By week’s end the S&P 500 had fallen 1.55%, the Dow had rallied 0.5%, and the Nasdaq had lost 3.8%.

Going into last week we knew it had the potential to be a wild five-day stretch, and the market didn’t disappoint as the indexes swung violently, and sector rotation was intense. By week’s end the S&P 500 had fallen 1.55%, the Dow had rallied 0.5%, and the Nasdaq had lost 3.8%.

Even the temporarily averted government shutdown can’t do much for this market. The S&P 500 is now down more than 7% from the 52-week high and may be headed to correction territory, down 10% or more.

The main problem is high interest rates. The benchmark ten-year Treasury rate continues to rise and just hit a new 16-year high near 4.7%. The Fed’s recent statement that interest rates will remain higher for longer continues to demoralize investors.

There were no earnings this past week, but earnings season is just around the corner. The beleaguered Walgreens Boots Alliance (WBA), without a permanent CEO, kicks off our season with its Thursday, October 12 report, followed the next day by Wells Fargo (WFC) and Citigroup (C).

WHAT TO DO NOW: Remain cautious, as there’s not much change with our indicators or stance—the intermediate-term trend of most stocks, sectors and indexes is down, and while sentiment is very bearish and a decent number of growth stocks are holding well, it’s best to stay close to shore until the buyers return. Yesterday, we sold one-third of our remaining position in ProShares S&P 500 Fund (SSO) and are now holding about 55% in cash.

The market has been on edge since the Fed’s hawkish tone and updated Summary of Economic Projections (SEP) last week. But if we can get oil and interest rates to back off a little and some stock-specific catalysts during the upcoming Q3 earnings season maybe we can finally take our macroeconomist hats off and get back to doing what we’d rather do. Which is talk about some of the great small growth stories out there!

The market and most Explorer positions struggled a bit this week except Conoco (COP), which is benefitting from crude oil hitting 2023 highs. Consumers and businesses are looking forward to the Fed ending interest rate increases as the inflation fight continues. Food inflation slowed to about 3% year-over-year in August, down from a troubling 13% a year earlier. Those topics, plus Japan, China and the electric vehicle arms race, in today’s Cabot Explorer update.

This market is officially flirting with ugly. The S&P is now down about 7% from the 52-week high and not far from correction territory, down 10% from the high.

The selling intensified over the last week after the Fed struck an unexpectedly hawkish tone at last week’s meeting. The gist of the Fed’s message is that rates may well go higher and will stay higher for longer. The statement pours cold water on the notion that rates will be cut in the near future and reinforces the realization that higher rates are here to stay.

Cisco Systems (CSCO) announced a huge $28 billion deal for security software specialist Splunk (SPLK). Regardless of concerns over the economy, rising interest rates, the incipient tech-driven Cold War II, rising government focus on anti-trust and other macro issues, there will always be blockbuster deals. We dig into the deal in our comments below on Cisco.

This week there were no earnings reports or ratings changes.

The highlight of my week so far just might be waking up this morning and realizing I can count the remaining days in September just using my fingers. That’s not because the weather hasn’t mostly been beautiful in Rhode Island. It has. It’s because, as you know, the market has struggled this month.

The surprisingly strong market of 2023 has been sputtering. The S&P 500 moved lower in August and is lower so far in September. But there’s no alarming selloff. The index is 3.6% lower than it was at the end of July. It’s mostly just a pause so far.

As readers may know, we are generally not the biggest fans of private equity. Our biggest concern is that, while earlier private equity and venture capital funds were remarkably successful in identifying and capturing highly profitable investments for their clients, more recent vintages, going back perhaps 10-20 years, have mostly produced large profits for the fund managers. News that many Johnny-Come-Lately funds will actually lose significant money on the Instacart IPO highlights this problem. High-quality and early movers will likely post enormous profits.

The market is always uncertain. No one ever really knows in which direction the next 5% or 10% move will be. But this is a much higher level of uncertainty than usual.

The good year so far has been a surprise. Most pundits were forecasting more gloom and doom at the beginning of the year. But the S&P 500 is up 15% YTD. It rallied on the promise of a soft landing and then got a further boost as artificial intelligence spending promises to be a strong growth catalyst for the market’s largest sector for years to come. After sputtering for the last six weeks, where does it go from here?

WHAT TO DO NOW: The minefield environment for individual stocks remains in place—today, Academy Sports (ASO), after showing solid support earlier this week, is falling apart with the group after loose peer Foot Locker (FL) is being taken apart on earnings. We’ll dump our remaining shares today. That will leave us with around 74% in cash—there’s a good chance we’ll put some to work next week if the market hangs in there, though with the meat grinder still intact, we won’t jump in heavily until we start to see more individual leaders and major indexes kick into gear.

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.

On Holding (ONON) is in full retreat mode since reporting what appeared to be mostly good earnings on Tuesday this week.

Our BITO May 19, 2023 puts are essentially worthless, so we can lock in some decent profits and immediately sell more puts.

Moving M/I Homes (MHO) to Sell

I will be exiting the Walmart (WMT) trade today.

Walmart (WMT) is due to announce earnings Thursday before the opening bell.

WHAT TO DO NOW: The overall market remains mixed, but the under-the-surface action remains a meat grinder, with numerous stocks getting chewed up after making big swings. Today, we’re cutting loose On Holdings (ONON), which had a great Q1 but has nevertheless seen sellers swarm. This will leave us with more than 70% in cash, which is too high given the evidence, so we may have a new addition or two in tomorrow’s issue, though we’ll have to see how it goes given the continued air pockets among potential leaders.

We have one short call position left in May that needs to be rolled, SPY. There is little to no value left in our May 19, 2023, 420 calls, so as a result, I want to buy back our 420 calls and immediately sell more calls. This should help to bring our deltas back in line as well.

Disney (DIS) is due to announce earnings today (Wednesday) after the closing bell.

Disney (DIS) is due to announce earnings today (Wednesday) after the closing bell.

Airbnb (ABNB) and Rivian (RIVN) Report

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.