Current Market Outlook


The market had become vulnerable to a short-term pullback in recent weeks, and now the normal post-Fed wobbles have turned into an abnormal selloff after the new round of Chinese tariffs, with today’s market plunge decisively cracking the intermediate-term uptrends of the major indexes and many leading stocks. Bigger picture, this is still a bull market until proven otherwise, but after some huge runs, many stocks that have been running for months likely need time to repair the damage. Interestingly, the fresher stocks (those that got going in May, June and July) are mostly hanging in there, and we’re not opposed to nibbling on them if you have some cash on the sideline. But at this point, your focus should be more on preserving capital (honoring stops, holding cash, cutting back on new buying) and waiting for bottoms to be formed. Our Market Monitor is back down to a level 4.
This week’s list is full of those fresher names, if you feel like taking a stab at a name or two. Our Top Pick is Inphi (IPHI), a high-potential stock that’s holding up well after earnings.

Stock Name	Price	Buy Range	Loss Limit
Agnico Eagle Mines (AEM)	79.05	53-55.5	48.5-49.5
Anaplan (PLAN)	47.52	51-53.5	46-48
Casey’s General Store (CASY)	165.73	159-162	147-149
Inphi (IPHI)	120.16	59-61	51.5-52.5
MasTec, Inc. (MTZ)	66.65	55.5-58	50.5-52
PagSeguro Digital (PAGS)	35.09	41.5-43.5	37.5-38.5
Pinterest (PINS)	35.86	32-34	28-29
SunPower (SPWR)	12.26	12.4-13.4	10.7-11.2
Survey Monkey (SVMK)	19.97	17.5-18.5	15.8-16.4
Twitter (TWTR)	40.37	39-41	36-37

Today’s recommendation is a software and infrastructure company specializing in communications. It just reported Wednesday night, and results were better than expected, which is great for two reasons.
First, the latest numbers support my thesis that this company has what it takes to grow over the long haul.
And second, we don’t need to stress about the company reporting right after we buy in! We have the latest data. And it looks good.
All the details are inside this month’s Issue.

In the last issue we thought growth stocks could easily have a few hiccups, and that’s generally what we’ve seen, with many well-known, extended titles hitting some turbulence. And, looking at the entire market, it lost some steam over the past three weeks, with the news-driven selling of the past two days doing some damage.

Bigger picture, our views haven’t changed at all -- this is a bull market that’s likely to move meaningfully higher in the months ahead. We remain heavily invested (88% in the Model Portfolio), but we’re watching things closely to see if this is more of a shakeout or the start of a sustained selling wave.

In tonight’s issue we write about one sector that appears to be breaking free of very long launching pad, with most components doing the same. (Our favorite name in the sector reports earnings tonight.) And we also run through all of our stocks, sharing our thoughts on many of them pre- and post-earnings.

By their nature, turnaround stocks involve a fair amount of risk. One way to help reduce that risk is to find out-of-favor stocks that offer high dividend yields. This puts hard cash in your pocket while you wait for the turnaround to take effect.

In this issue, we list six additional out-of-favor stocks that have high dividend yields which we believe are sustainable and also have turnaround potential:

The markets keep sailing along, although at a slower pace. The Dow Jones Industrial Average gained about 400 points since the last issue. The economy remains strong, with both new home and pending house sales rising. Unemployment continues to decline. Overall, a nice, sound economy.

And as you’ll see in our Market Views section, our contributors continue to be bullish.

After a fantastic showing for our 2019 Top Picks last month, our contributors are continuing to find some great stocks with big potential for you.

The market continues to slowly slog higher in the dog days of the summer. It’s a time of year when investors are more focused on squeezing more fun out of the last days of the summer than investing. Markets seem to behave the same way they did when investors stopped paying attention. In this case it likely means a higher crawl until Labor Day.
Of course, an outside event can always change things. We’ll see what happens with today’s Fed rate decision. But unless something rocks the boat, markets will probably remain on autopilot for the next month or so.

The broad market remains in fine health, with the major indexes trending higher and sentiment measures still bullish. Thus I continue to recommend that you be heavily invested in a diversified portfolio of stocks that fit your investment needs.

Last week’s recommendation was an undervalued cyclical business, and this week we swing back to a fast-growing cloud software stock with strong momentum and big upward potential.

Current Market Outlook


The overall market remains in good shape, with the major indexes and most leading stocks in uptrends. That said, today was a very bad day for growth stocks, as big investors hit the sell button almost from the get-go, leaving most of this year’s winners down sharply. Given the monstrous runs in many of these names and (in some cases) some recent stalling out action, we do take this as a yellow flag—however, to be fair, few have broken any key support and most non-growth issues look completely fine. Bottom line, if you have some good-sized profits and positions, we’re OK booking a couple of partial profits and honoring stops and loss limits going forward. On the buy side, we continue lean toward “fresher” titles, including many steadier growers that have come into favor.
This week’s list has a bunch of names that, until recently, have been marking time, but now look to have begun steady uptrends. Our Top Pick is Teradyne (TER), which leapt out of a huge base on earnings last week.

Stock Name	Price	Buy Range	Loss Limit
Chipotle Mexican Grill (CMG)	773.32	780-805	710-720
Etsy (ETSY)	112.97	67-69.5	59-61
Kirkland Lake Gold (KL)	51.30	43-46	38.5-40
Lithia Motors Inc. (LAD)	146.30	129-132	118-120
Meritage Homes (MTH)	102.20	60.5-63.5	54.5-56.5
New Oriental Education (EDU)	113.97	102-106	91-93.5
Sherwin-Williams (SHW)	526.09	490-505	455-460
Snap Inc. (SNAP)	16.68	16.8-18	14-15
Teradyne (TER)	82.83	55-58	48.5-50.5
TransUnion (TRU)	83.09	79-82	72-73.5

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.

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.

Our latest recommendation, pulled back sharply after reporting earnings Friday morning.

Citigroup recently upgraded this medical device company’s shares to ‘Buy”.

One stock moves from Hold to Buy, one moves from Hold to Sell, and we have earnings reports on five stocks.

Emerging from a scandal, this energy stock is still somewhat speculative, but two analysts have recently increased their EPS estimates, and most industry specialists expect the dividend to return.

Analysts at Piper Jaffray recently upgraded the stock of this chicken producer to ‘Overweight’.

One of our stocks reported earnings per share that beat analyst estimates. Revenue came in on target, expenses came in below estimates and operating income came in much higher than expected.

This medical device maker beat earnings estimates by $0.27 last quarter, and fourteen analysts have increased their EPS forecasts for the company in the past 30 days.

Three of our stocks reported fourth-quarter 2017 results this morning.

We sold half our WYNN shares in August for a 36% gain, and have an unrealized profit of 76% on our remaining position. I’m going to sell another half of our shares today, to protect some of our remaining profit.

This international wellness company beat analysts’ estimates by $0.14 last quarter.

Lots of uncertainty around marijuana, but the profit potential looks very attractive. Investors unsure of individual stocks may want to take a look at this ETF.

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.