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.

Current Market Outlook


The 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	Buy Range	Loss Limit
Alteryx (AYX)	132.78	56-60	49-51
Atlassian (TEAM)	182.16	85-90	75-78
Broadcom Limited (AVGO)	266.26	244-250	220-225
Crocs (CROX)	0.00	25-36.5	22-23
Deckers Outdoor Corp. (DECK)	141.68	123-128	111-113
Elastic (ESTC)	86.17	67-71	58-60
Planet Fitness (PLNT)	0.00	51.5-54	46-47.5
ServiceNow (NOW)	341.86	173-180	157-161
Tencent Music Entertainment (TME)	18.41	12.7-13.5	11-11.5
Zscaler (ZS)	126.22	37-39.5	33.5-35

The way the markets have been acting, it won’t be a chore to say goodbye to 2018. We’ve avoided the worst of the declines of the second half of the year, but the bears have definitely had the upper hand for months. That’s why I’m featuring an unaccustomed defensive stock in today’s issue.

Like the broad market, many of the stocks in the portfolio have had a rough time over the past month, as investors have been spooked by fears of inflation and trade wars. But as the end of the year approaches, so does the incentive to take losses for tax purposes, and my optimistic reading is that most of the marijuana stocks have bottomed—though it may take a while for uptrends to be reestablished

This volatility is out of sync with the strong economy. Job openings are up, housing starts and building permits are still healthy, and retail sales are enjoying a good holiday romp. But it seems to be politics (as usual) that is driving the market’s gyrations, including the ‘wall’, with Trump threatening to shut the government down due to lack of funding, China’s continued exposure as an international hacker and spy, and the continuing investigation into our leader’s affairs, especially as regards to Russia.

Nevertheless, while short-term sentiment has turned more bearish, long-term, market mavens continue to be bullish, yet expect the volatility to continue.

I launched Cabot Dividend Investor five years ago to help investors like you build a balanced portfolio of reliable dividend-paying stocks. It’s been a great journey, and I hope you’ve learned a lot and have made some money.
Cabot Dividend Investor isn’t going anywhere, but it’s time for me to move on. I’m excited to pursue new opportunities in the New Year, and I’ll be leaving you in great hands. Tom Hutchinson, the new Chief Analyst of Cabot Dividend Investor, will introduce himself in this month’s issue, with his take on the market and an exciting new stock pick.
But before I turn everything over to Tom, I’m going to wrap up a few loose ends in the portfolio—some things have unraveled a bit over the past month.

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.

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.

This restaurant company is seeing double-digit revenue and earnings increases, and is growing rapidly via acquisition.

Here are earnings updates on two of our stocks.

This aero-structure company’s EPS forecasts were increased by 13 analysts in the past 30 days.

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.