Issues
The good news today is that both our intermediate-term market timing tool, Cabot Tides, and our emerging markets timing tool, Cabot Emerging Markets Timer, have both flashed buy signals, telling us that we should work to get more heavily invested, by buying attractive stocks at sensible entry points.
Current Market OutlookStocks had another great week, with the major indexes posting solid gains, many potential leaders approaching new highs and market breadth being so positive that it flashed a rare “blastoff” green light. Thus, our confidence is growing that the worst has passed—though that doesn’t mean the market doesn’t face many weeks of bottom building, either. Long story short, the evidence has improved, though it’s worth remembering that the intermediate-term trend of the indexes and most stocks remains down. All in all, we’re OK extending your line a bit, doing some new buying in high-potential stocks, but we’re also still keeping a good chunk of cash on the sideline and waiting for more strength to develop (maybe after a retrenchment) before turning bullish. Our Market Monitor moves to a level 5 this week.
As for the list, today is another batch of good-looking stocks from a variety of sectors, albeit with a heavier emphasis on medical. Our Top Pick is old favorite Dexcom (DXCM)—start small and build if the recent strength continues.
| Stock Name | Price | ||
|---|---|---|---|
| Array Biopharma (ARRY) | 46.35 | ||
| Cree, Inc. (CREE) | 67.96 | ||
| Dexcom (DXCM) | 421.36 | ||
| Everbridge (EVBG) | 107.90 | ||
| Five Below (FIVE) | 134.58 | ||
| Ionis Pharmaceuticals (IONS) | 73.34 | ||
| Keysight Technologies, Inc. (KEYS) | 97.20 | ||
| LGI Homes (LGIH) | 86.04 | ||
| Tandem Diabetes (TNDM) | 74.77 | ||
| Vertex Pharmaceuticals (VRTX) | 230.36 |
In the first week of 2019, a better overall stock market, weaker U.S. dollar, bargain hunting, and hopeful signs of a temporary truce in the U.S.-China trade war have all helped push our Emerging Markets Timer back into a bullish mode.
As with our prior signals, we’re not advising you to jump in with both feet since there is still a fair amount of uncertainty out there and the iShares EM Fund (EEM) needs to demonstrate staying power and work through some resistance. Still, we are extending our line a bit with our two new buys in today’s issue.
As with our prior signals, we’re not advising you to jump in with both feet since there is still a fair amount of uncertainty out there and the iShares EM Fund (EEM) needs to demonstrate staying power and work through some resistance. Still, we are extending our line a bit with our two new buys in today’s issue.
Congratulations to our big winners and thank you to all of our contributors. It was a difficult market last year, but these results reflect how—with the right expert help—it is possible to beat the markets.
In this issue, we recap our big winners from last year, and have a very nice—and diversified list—of a group of stocks that promise great potential for 2019.
In this issue, we recap our big winners from last year, and have a very nice—and diversified list—of a group of stocks that promise great potential for 2019.
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.
Updates
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.
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.
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 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.
Alerts
This trucking company beat analysts’ estimates by $0.02 in its last quarter, and Wall Street is expecting double-digit growth next year.
Two of our stocks reported strong quarterly results.
Wall Street believes this healthcare stock is going to produce double-digit growth over the next five years. The shares were recently upgraded by Morgan Stanley to ‘Overweight’.
The earnings forecasts for this pharma company were just increased by 14 analysts, and the stock has received two upgrades.
Three analysts have increased their earnings estimates for this telecom company in the last 30 days.
The earnings forecasts for this internet marketplace have been raised by 11 analysts in the past 30 days.
When share prices fall, it’s important to determine whether the situation will last for a couple of months, which can be quite normal, or for several years, which can be insufferable.
With a sizeable earnings beat ($0.29), 14 analysts have now raised their forecasts for this drug company.
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.
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.