Issues
The market’s main trend remains up, with many major indexes hitting new highs in recent days—and many of our stocks doing the same. Those are the stocks you should hang onto tightly—because there’s no telling how far they’ll run.
Current Market OutlookThe strength that began around July 4 continued last week as big investors returned to their desks, pushing most major indexes to marginal new recovery highs. There’s still plenty of news-driven action (volume was light even through last week), and earnings season, which is beginning to get underway in earnest, is sure to have an impact. But the intermediate-term trend (which was iffy in late June) has rejoined the longer-term trend on the upside, and many leading stocks have either snapped back to new highs or are building sound launching pads. We’re always on the lookout for renewed selling pressure, but the evidence has improved, so we’re moving our Market Monitor back to a level 8.
This week’s list is again heavy on growth stocks, though there are a couple of special situations presented as well. Our Top Pick is ZTO Express (ZTO), a young, volatile Chinese stocks with huge growth and a very strong chart. Start small, ideally on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Energen (EGN) | 77.04 | ||
| Etsy (ETSY) | 112.97 | ||
| GDS Holdings Limited (GDS) | 80.15 | ||
| Grand Canyon Education (LOPE) | 121.03 | ||
| Madrigal Pharmaceuticals (MDGL) | 234.07 | ||
| Palo Alto Networks (PANW) | 236.92 | ||
| Roku, Inc. (ROKU) | 150.46 | ||
| Sonic Corp. (SONC) | 35.22 | ||
| Workday (WDAY) | 194.88 | ||
| ZTO Express (ZTO) | 28.84 |
The shift from Wednesday’s pullback to today’s nice market bounce is just par for the course as investors scramble to figure out the fallout from alarming headlines and conflicting predictions. It’s not an easy market to navigate, and the portfolio is dealing with it by holding a heavy (50%) cash position and cutting back on most buying. But we’re still finding attractive stocks for our watch list, and will be ready when we finally get a green light from the Cabot Emerging Markets Timer.
The economy remains strong, prompting the Federal Reserve to raise interest rates another 25 basis points, and signaling that two more rate increases are in the cards for the rest of this year. The unemployment rate for June did rise from 3.8% to 4%. But the housing market remains healthy and estimated second quarter earnings growth for the companies in the S&P 500 Index is 20%. If that number is correct, it will be the second best earnings growth that we’ve seen since the third quarter of 2010.
Eternal vigilance is the price of investment success. For us, that means continually adapting our portfolio so that it is best positioned to benefit from the stocks that can do well in today’s market.
Current Market OutlookIt came on low volume and Independence Day made it just four days, but last week’s trading action was encouraging, with the major indexes generally holding key support early in the week and then bouncing nicely into the weekend. By our measures, the intermediate-term trend is still tilted up, and while there are fewer stocks hitting new highs than there were a few weeks back, there remain many stocks in good shape. With the improved evidence, we’re nudging our Market Monitor up a notch to 7; like we just wrote, last week was encouraging. But we also want to see how the indexes and leading stocks handle themselves now that big investors are back at their desks and earnings season gets underway.
This week’s list is again heavy on growth-oriented stocks, including a couple of newer names we haven’t seen before. Our Top Pick is Vertex Pharmaceuticals (VRTX), which has surged toward the top of an 11-month consolidation. We’re OK starting small and adding more if shares advance.
| Stock Name | Price | ||
|---|---|---|---|
| AeroVironment (AVAV) | 80.48 | ||
| Carrizo Oil & Gas (CRZO) | 24.03 | ||
| Dexcom (DXCM) | 421.36 | ||
| iRhythm Technologies (IRTC) | 51.15 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Novocure (NVCR) | 0.00 | ||
| Shake Shack (SHAK) | 92.08 | ||
| Twitter (TWTR) | 40.37 | ||
| Vertex Pharmaceuticals (VRTX) | 230.36 | ||
| Yext Inc. (YEXT) | 21.32 |
With this month’s new addition, I decided to go in a different direction then we have with previous recommendations. Instead of featuring another rapid-growth medical device or software stock, I’ve selected a consumer defensive stock in a very specialized industry and with a more modest growth profile. It’s the perfect summertime stock for a period in which many growth stocks are acting a little schizophrenic—especially for those investors who like getting out of the house for a bite to eat and a good beer or glass of wine.
One of the minor predictable patterns that the stock market has developed over the years involves the days before and after holidays (like the Fourth of July). Basically, stocks do a little bit better on those days, but the pattern is neither big enough nor dependable enough to make money on. Still it’s worth keeping in mind as you watch the action of stocks this week.
Updates
The market rolls sideways amidst a slew of conflicting forces.
The S&P 500 has bounced around and is at the same level it was in the middle of May. The primary culprit is technology. That sector has been in a funk. The S&P 500 is hard-pressed to generate any lasting traction while this massive sector, accounting for over 40% of the index, flounders.
The S&P 500 has bounced around and is at the same level it was in the middle of May. The primary culprit is technology. That sector has been in a funk. The S&P 500 is hard-pressed to generate any lasting traction while this massive sector, accounting for over 40% of the index, flounders.
The market has gone sideways since May. It seems to be deciding what to do.
It’s encouraging that the resumption of hostilities with Iran has not sent the market lower. It’s also positive that oil prices aren’t rising back to the $100 level earlier in the war, although prices have risen. It’s also another earnings season and analysts expect a big one.
It’s encouraging that the resumption of hostilities with Iran has not sent the market lower. It’s also positive that oil prices aren’t rising back to the $100 level earlier in the war, although prices have risen. It’s also another earnings season and analysts expect a big one.
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.
Alerts
Last week, a shoddy take-down article was written about one of our holdings on Seeking Alpha. It was written by an anonymous author, was poorly constructed and failed to undermine (in my opinion) the most important parts of the long-case for the company.
The broad market finally firmed up last week. After closing below their 50-day lines the previous Friday, the Dow, S&P 500 and Nasdaq all found support early last week, then rebounded strongly at the end of the week. However, while the market is firming, four of our holdings stumbled on earnings last week.
This is a small cap company with double-digit growth rates. It operates in the booming battery sector.
Mattel (MAT) reported a poor first quarter, largely due to continuing overhang from a poor holiday season.
This stock reported earnings that met estimates this morning, but revenue fell short of expectations and the stock is about 3% lower mid-morning.
This stock reported first-quarter EPS that fell well short of expectations last night and the stock is trading 6% lower pre-market.
This vehicle reseller just opened its sixth location in Brazil. Its shares recently crossed their 50-day moving average, a bullish indicator.
Verizon (VZ) reported earnings that missed estimates this morning. U.S. Bancorp (USB), on the other hand, reported estimate-beating earnings.
The top five holdings in this fund are Oracle Corp (ORCL, 3.70% of assets); Tencent Holdings Ltd (TCTZF, 3.53%); United Technologies Corp (UTX, 3.22%); American International Group Inc (AIG, 3.19%); and Citigroup Inc (C, 2.98%).
This financial company beat earnings estimates by $0.03 in the last quarter, and two analysts have recently increased their forecasts for this year and next.
This healthcare company beat analysts’ earnings estimates by $0.07 last quarter, and is on target for double-digit growth in the next five years.
This home builder beat analysts’ earnings estimates by $0.07 last quarter, and its shares were recently upgraded by RBC Capital Mkts to ‘Outperform’.
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.