Current Market Outlook


The rapid spread of China’s coronavirus provided the impetus for a selloff that began last Friday and exploded onto the scene today. Where does that leave us? First, the intermediate-term trend of the indexes is still positive but close to the fence; the big-cap indexes look OK, but the broader measures (small and mid caps) are right around their key 50-day lines. Beyond the charts, it’s likely that more time is needed for investors to trim/hedge after four months of straight-up action. As for leading stocks, we’re taking it on a case-by-case basis—some are looking ragged and ripe for a deeper correction, but most are pulling back normally. If you’re heavily invested, our advice is to follow the usual plan: Hold most of your shares in your strong, profitable stocks, while selling or keeping tight leashes on losers and laggards. We’re moving our Market Monitor down to a level 6.

On the buy side, newer names that are holding up well should be near the top of your shopping list. This week features plenty of those, with our Top Pick being Kansas City Southern (KSU), a reliable grower that just reacted well to earnings.

Stock Name	Price	Buy Range	Loss Limit
Agios Pharmaceuticals, Inc. (AGIO)	52.43	50.5-52.5	45.5-47
Bristol-Myers (BMY)	66.24	62-64	59-60.5
Datadog (DDOG)	81.52	39.5-41.5	36.5-38
Kansas City Southern (KSU)	176.54	162-165	150-152
Sea Limited (SE)	132.86	42.5-44.5	38-39
Snap Inc. (SNAP)	16.68	18-19	16-16.5
STMicroelectronics (STM)	30.09	27.5-28.5	25-25.5
Taiwan Semiconductor (TSM)	78.41	57-58.5	53-54
Wix.com (WIX)	302.53	137.5-141	127.5-129
Zillow (Z)	76.64	46-48	42.5-44

The long-awaited market correction has finally begun, and while you may be tempted to tie the correction to fundamental events, I don’t find any value in that—because all that news is public information so it has no real value to us. Instead, I prefer to watch the action of the stocks carefully, to judge where the money is flowing. And the result of my observations today is that we will sell four stocks and downgrade another to hold—and then continue watching.

As for this week’s recommendation, it’s a high-potential little medical stock that most investors haven’t heard of. It’s not for everyone, but it does provide diversity to our portfolio and it may be perfect for yours.



Details in the issue.

This week’s leading issue is the China virus, which is impacting markets.
We will need to keep an eye on this breaking issue. Still, Virgin Galactic jumped another 14% yesterday and is up over 80% in the last month.

Our emerging market timer is clearly positive and today’s recommendation is an emerging country that is the overlooked big winner from the two recent trade deals. It is in a nice uptrend and has fuel to burn going forward, backed by several positive trends.

Global investment bank Morgan Stanley thrilled investors last week by delivering record profit and revenue numbers, beating Wall Street’s fourth quarter 2019 revenue and earnings estimates, and meeting or exceeding all of CEO Jim Gorman’s performance targets.

Current Market Outlook


The market remains extremely strong, as the combination of a new year and reduced anxiety about China trade has encouraged the bulls and calmed the bears. At the same time, a broad correction is increasingly overdue, as numerous stocks have grown increasingly stretched far above their moving averages. Thus, when you do buy, you need to do so with an eye not just to the potential upside but the potential downside as well.

The ideal buy for many of today’s stocks might be on a brief pullback that finds support. Stocks in this issue range from global giants like Morgan Stanley and Match to smaller, faster-growing technology companies like touch-screen expert Synaptics and chipmaker-for-Apple Cirrus Logic. Our Top Pick this week is iQiYi (IQ), a fast-growing Chinese media/technology company that has its tentacles in numerous fields and is succeeding at many of them.

Stock Name	Price	Buy Range	Loss Limit
Cirrus Logic Inc. (CRUS)	0.00	80-83	75-77
iQIYI (IQ)	0.00	22-23.5	20-21
Match (MTCH)	0.00	85-88	80-82
Morgan Stanley (MS)	0.00	55-57	50-52
Novocure (NVCR)	0.00	90-93	80-82
Synaptics (SYNA)	0.00	68-72	60-64
Teladoc, Inc. (TDOC)	127.95	93-97	75-80
Thor Industries (THO)	104.76	75-80	63-66
Toll Brothers Inc. (TOL)	0.00	42-44	38-39
Vertex Pharmaceuticals (VRTX)	230.36	230-235	210-215

The market remains in fine health, with all major indexes in strong uptrends and no signs of divergence that typically precede major market tops. Additionally, numerous market-timing indicators tell us the market is likely to be higher months from now. However, as all investors know, corrections will occur, and it’s looking increasingly likely that one is due. So, you should be prepared. This might mean taking profits in stocks that are extended—as many are now. Or it just might mean setting some stops, so that winners don’t turn into losers. In the meantime, there are plenty of fine-looking stocks to buy, and today I’m leaning toward an Asian company that happens to have my favorite fundamental characteristic—accelerating revenue growth.

Details in the issue.

Happy New Year! It was a great year for the markets with the DJIA gaining 22.3%, the S&P 500 up 28.9%, and the Nasdaq rose 35.2%. But it was even a better year for us! Our Top 5 Picks for 2019 averaged returns of 131%! William Velmer of S.A. Advisory was our big winner. His stock idea gained an astonishing 332%!

Congratulations to all our contributors. And 2020 looks just as promising. Employment is healthy and so is the housing market. Economists are calling for several rate decreases, which should continue to help housing. And as you can see in our Advisor Sentiment Barometer, the investment world remains very bullish.



More details in the issue.

The market remains super strong, and we’re pleased to see many growth stocks that rested during December break out to new highs so far this year. Shorter-term, the lack of good entry points among stocks we’re watching is a reason we’re still holding a chunk of cash on the sideline. But we remain very bullish longer-term and think pullbacks and/or shakeouts will provide some solid entry points.

Tonight, we’re standing pat once again with our collection of stocks, most of which act great. In the issue, we do write about one big-cap name that we think has regained its status as a liquid leader (Alibaba), and it’s probably the top stock on our watch list today. Elsewhere we do highlight some other ideas, and as always, share our latest thoughts on all the stocks we own.

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.

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.

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 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.

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.

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.

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.

Markets are facing more inflation as the Iran mess gets messier. Concerns over high AI capital spending are a cloud over a resilient market. On the bright side for our portfolio, however, International Business Machines (IBM) shares were up 7.4% this week following last week’s 8.9% gain. Sea Limited (SE) shares leapt 9.6% this week and are up about 20% over the past month. MercadoLibre (MELI) shares are up 11.6% over the last two weeks.

I remain bullish on stocks, but I am turning more cautious, winding down leverage, and letting some cash build up in my non-marginable accounts.

The reason is that spooky season lies just around the corner. September and October are typically the weakest months of the year. We also often see weakness in July and August, perhaps as investors get nervous about those looming difficult months.

After a very strong run since the March lows, the market appears to be going through a healthy, albeit somewhat uncomfortable, rotation.

The biggest winners from the AI and semiconductor trade are finally seeing some profit-taking, with Goldman Sachs (GS) noting that momentum stocks recently suffered their worst two-day decline since 2020. UBS (UBS) just said that the momentum factor is down roughly 20% from its June peak, marking the seventh-largest drawdown of the last decade and the fastest decline of that magnitude on record.

The S&P 500 was down in June after rising sharply in April and May. But that doesn’t tell the whole story.

Most stock sectors had a strong month in June. The four best-performing sectors and their returns over the last month include the following: health care (11.2%), financials (8.44%), industrials (6.87%), and utilities (6.64%). Information technology, which drove the S&P higher in April and May, is the worst-performing sector over the last month with a negative 8.75% return.

This morning, our longest and most-profitable holding, came under attack by Muddy Waters, a firm that specializes in publishing negative research on a company and selling its stock short.

The top three sectors for this fund are: Real Estate, 52.83%; Financial, 24.8%; and Consumer Cyclical, 14.17%.

The top five holdings are in the ETF mentioned today.

The shares of this retailer were recently initiated at Wells Fargo with an ‘Outperform’ rating, and upgraded at Oppenheimer to ‘Outperform’, PiperJaffray to ‘Overweight’, and Goldman Sachs to ‘Buy’.

The shares of this energy company were recently upgraded by Bank of America to ‘Buy’.

The market was mixed today, as the Dow rose 94 points, but the Nasdaq dropped 54 points and many growth stocks were hit hard.

An important stock sector reclassification has begun that can affect your shares prices. And we’re selling one stock from the portfolio.

Sharing the top five holdings of this ETF.

This chip maker beat analysts’ estimates by $0.08 last quarter and 19 analysts have raised estimates for the company in the past 30 days.

Eight analysts have increased their EPS estimates for this real estate company in the past 30 days; the company beat Wall Street’s earnings estimates by $0.37 in its most recent quarter.

This Canadian cannabis company began trading publicly earlier this month, and Aurora Cannabis (ACB.TO), a $4.5 billion company owns a significant portion of its shares.

A performance review of the Buy Low Opportunities Portfolio; and a new stock joins the Buy Low Opportunities Portfolio as a Strong Buy.

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.