Issues
Market action has gotten hairy, but it’s no reason to panic. In today’s issue I suggest some defensive moves, plus I have a new, nearly-bulletproof recommendation for dividend growth investors.
The market has taken a turn for the worse during the past week—the February/March rally attempt is over, and now we’re even seeing the sellers come around for growth stocks, which had been resilient. It’s not a time for panic, but we’re taking action, having sold three stocks during the past couple of weeks and, tonight, half of another, leaving the Model Portfolio with around 44% in cash.
While 2017 was one of the least volatile years ever for the market, 2018 has seen volatility return—with a vengeance! Early February brought the greatest point decline in history for the Dow, while yesterday brought the biggest one-day advance since August 2015 for the Dow, S&P 500 and Nasdaq.
Today, my recommendation is outside the U.S., and outside China, too! In fact, my recommendation is in Brazil, where a young airline is enjoying rapid growth and the chart is positive.
Today, my recommendation is outside the U.S., and outside China, too! In fact, my recommendation is in Brazil, where a young airline is enjoying rapid growth and the chart is positive.
Current Market OutlookThe month-long rebound that began in early February clearly cracked last week, with the major indexes falling below key support and with some indexes (like the S&P 500 and NYSE Composite) retesting their February closing lows. There are still many stocks holding up well, including most of the growth-oriented names that exploded higher on big volume in February; however, as we saw last week, good stocks can go down in a hurry when the market hits the skids. Overall, we’re shifting our Market Monitor back down to neutral, and the onus is on the bulls to change that—a few strong days could make all the difference, but this downturn may continue until enough investors have thrown in the towel after the market’s huge run last year. We still advise holding strong, profitable stocks, but new buying should be limited and holding a good-sized chunk of cash on the sideline makes sense.
This week’s list still has a lot of good stories and solid charts, and includes a few newer names. Our Top Pick is ServiceNow (NOW), which remains exceptionally resilient. Just remember to keep new buys small given the market.
| Stock Name | Price | ||
|---|---|---|---|
| Chegg (CHGG) | 74.21 | ||
| Continental Resources (CLR) | 66.19 | ||
| Floor & Décor (FND) | 68.03 | ||
| Fortinet Inc. (FTNT) | 137.53 | ||
| HealthEquity, Inc. (HQY) | 70.70 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| PagSeguro Digital (PAGS) | 35.09 | ||
| Penumbra Inc. (PEN) | 173.25 | ||
| Red Hat (RHT) | 0.00 | ||
| ServiceNow (NOW) | 341.86 |
The possibility of a trade war between the U.S. and China has dealt a blow to many Chinese stocks. Most of the damage is being done by withdrawals from China exchange-traded funds and broader emerging-market or ex-U.S. funds. But whatever the source, the reality is that we have a new warning signal from the Cabot Emerging Markets Timer.
Volatility is the theme in the 2018 markets. And while the markets have bounced about since our last issue, at least the momentum has been upward, with the Dow Jones Industrial Average gaining almost 600 points.
The economy continues to grow at a healthy pace, with job openings increasing, unemployment steady and consumer sentiment rising.
Market sentiment, as you’ll see in our Advisor Sentiment Barometer and our Market Views remains bullish, although some of our contributors are expressing caution in the long run.
The economy continues to grow at a healthy pace, with job openings increasing, unemployment steady and consumer sentiment rising.
Market sentiment, as you’ll see in our Advisor Sentiment Barometer and our Market Views remains bullish, although some of our contributors are expressing caution in the long run.
Current Market OutlookThe market had a brutal day today, with the major indexes (especially the Nasdaq, which had been the strongest index) plunging on big volume. (The reason, Facebook’s naughtiness, doesn’t matter much to us.) Today’s dramatic move calls into question the market’s recent rally—most indexes we track are still hovering above key support, but net-net, there hasn’t been any progress for the past eight to 10 weeks, which isn’t ideal. As for leading growth stocks, they did get hit today, though most remain in good shape on their charts. All in all, we’re still in favor of holding your strong, profitable stocks and giving them a chance to consolidate. But with the market evidently still not out of the woods, it’s best to go slow on the buy side and make sure you honor your stops and loss limits while we watch to see how the market reacts to this selling wave.
This week’s list is more full of what we’d term secondary leaders—still great potential, but not the liquid leaders we’ve seen pop up in recent weeks. One exception: Nutanix (NTNX), which looks like an emerging blue chip of sorts, is our Top Pick—pullbacks would be very tempting after its super-powerful breakout.
| Stock Name | Price | ||
|---|---|---|---|
| AAXN (AAXN) | 87.11 | ||
| Baozun (BZUN) | 44.24 | ||
| HCA Healthcare (HCA) | 137.60 | ||
| Insulet (PODD) | 175.69 | ||
| Loxo Oncology (LOXO) | 186.59 | ||
| MKS Instruments (MKSI) | 109.43 | ||
| Nutanix (NTNX) | 55.91 | ||
| Pegasystems (PEGA) | 0.00 | ||
| PTC Therapeutics (PTCT) | 0.00 | ||
| Vipshop Holdings (VIPS) | 14.25 |
Updates
What a difference a month can make! What an April! The S&P rose 9.6% in April, making it the best single month for the market in six years. It hit an all-time high on Friday.
Sure, the war isn’t over. But the market doesn’t really seem to regard it as a war anymore, more like a blockade situation with the possibility of some skirmishes. While there is still headline risk, investors have moved beyond this war and are focusing on earnings. And for good reasons.
Sure, the war isn’t over. But the market doesn’t really seem to regard it as a war anymore, more like a blockade situation with the possibility of some skirmishes. While there is still headline risk, investors have moved beyond this war and are focusing on earnings. And for good reasons.
The results are in for the month of April. It was fabulous. The S&P rose 9.6%, making it the best single month for the market in six years. It hit an all-time high on Friday.
Sure, the war isn’t over. But the market doesn’t really seem to regard it as a war anymore, more like a blockade situation with the possibility of minor skirmishes. While there is still headline risk, investors have moved beyond this war and are focusing on earnings.
Sure, the war isn’t over. But the market doesn’t really seem to regard it as a war anymore, more like a blockade situation with the possibility of minor skirmishes. While there is still headline risk, investors have moved beyond this war and are focusing on earnings.
Now before you call me crazy concerning today’s newsletter headline, hear me out.
Even though large-cap names have garnered more than a fair share of attention among investors this year, I think a case can be made that companies with big capitalizations have a lot more room to run higher before they can be truly regarded as “overbought” or “played out.”
Even though large-cap names have garnered more than a fair share of attention among investors this year, I think a case can be made that companies with big capitalizations have a lot more room to run higher before they can be truly regarded as “overbought” or “played out.”
The market is digesting the push and pull of higher oil prices, a deeply divided Federal Reserve, prospects for a prolonged blockade of the Strait of Hormuz and fading momentum from the AI trade that helped push markets to all‑time highs earlier this month.
Despite the crosscurrents, the overall tone still tilts bullish, supported by investor comfort (for the time being) with the geopolitical tension, resilience in the U.S. economy, and improving visibility into earnings growth over the coming quarters.
Despite the crosscurrents, the overall tone still tilts bullish, supported by investor comfort (for the time being) with the geopolitical tension, resilience in the U.S. economy, and improving visibility into earnings growth over the coming quarters.
Yesterday, four tech giants, Alphabet, Amazon, Meta and Microsoft, representing 22% of the S&P 500’s market value, reported strong quarterly earnings that highlighted the importance of AI.
You might think the above companies and their AI brethren are “asset light” companies but you would be very wrong.
You might think the above companies and their AI brethren are “asset light” companies but you would be very wrong.
It’s been a glorious April following a miserable March for the market. What happens in May may determine which direction stocks are headed for the rest of the year.
That’s probably overstating things a bit, but May should be crucial for the reasons we discussed last week: namely, the fate of the Iran war, but also the bulk of first-quarter earnings season and the introduction of a new Fed chair.
That’s probably overstating things a bit, but May should be crucial for the reasons we discussed last week: namely, the fate of the Iran war, but also the bulk of first-quarter earnings season and the introduction of a new Fed chair.
What war? This market is moving on. We may not be out of the woods yet, but investors are looking beyond the Iran war.
Stocks have already made up all losses from a rough March and then some. The S&P 500 had fallen 7.7% in the month of March by the 30th. Since then, the index has rallied over 13%. The S&P is now at a higher level than before the war began and is hitting new all-time highs.
Stocks have already made up all losses from a rough March and then some. The S&P 500 had fallen 7.7% in the month of March by the 30th. Since then, the index has rallied over 13%. The S&P is now at a higher level than before the war began and is hitting new all-time highs.
The other day I was paid a visit by a roving ISP salesman who was pitching his company’s fledgling internet service over the local monopoly’s. We struck up a conversation and he asked what I did for a living. When I told him, his eyes lit up and he asked, “Got any good stocks you can recommend?”
Without thinking I blurted out, “Anything AI-related. You can’t go wrong.” The advice was only semi-facetious, for there’s undeniably a degree of truth behind it. My instinctive response to that question also prompted me to consider the question: just how long can the broad market continue its “all things AI” run without broader sector participation
Without thinking I blurted out, “Anything AI-related. You can’t go wrong.” The advice was only semi-facetious, for there’s undeniably a degree of truth behind it. My instinctive response to that question also prompted me to consider the question: just how long can the broad market continue its “all things AI” run without broader sector participation
Note: I’m out of town this week, so I’ll be a bit briefer on the update today—but I’m still checking my laptop a couple of times a day if you have any questions or comments. I’ll be back at my desk come Monday. Cheers.
WHAT TO DO NOW: Remain optimistic. The market and some leaders have hesitated, but all of our market timing indicators are bullish, and most stocks we own or are watching are working. Last Friday, we bought a half-sized stake in Nebius (NBIS) and added a 3% additional stake in ProShares S&P 500 Fund (SSO); earlier this week, we sold our small remaining position in GE Aerospace (GE); and tonight, we’ll buy a half-sized position (5% of the portfolio ) in Cava (CAVA). We’ll still have 46% in cash or so after these moves.
WHAT TO DO NOW: Remain optimistic. The market and some leaders have hesitated, but all of our market timing indicators are bullish, and most stocks we own or are watching are working. Last Friday, we bought a half-sized stake in Nebius (NBIS) and added a 3% additional stake in ProShares S&P 500 Fund (SSO); earlier this week, we sold our small remaining position in GE Aerospace (GE); and tonight, we’ll buy a half-sized position (5% of the portfolio ) in Cava (CAVA). We’ll still have 46% in cash or so after these moves.
Despite all the headline noise lately we’re marching deeper into first‑quarter earnings season with the market’s path of least resistance still pointing higher.
Optimism around the extension of the tentative ceasefire in the Middle East has reduced geopolitical anxiety to a seemingly manageable level. The U.S. economy continues to show resilience, and the corporate earnings outlook points toward meaningful growth in the coming quarters and years.
Optimism around the extension of the tentative ceasefire in the Middle East has reduced geopolitical anxiety to a seemingly manageable level. The U.S. economy continues to show resilience, and the corporate earnings outlook points toward meaningful growth in the coming quarters and years.
The old saying, “History doesn’t repeat itself, but it rhymes,” is an apt one for the stock market these last two years.
In early 2025, the S&P 500 raced to new all-time highs before peaking in late January/early February, only to get dragged down in March and April by a geopolitical crisis (tariffs/Liberation Day), before rallying in a V-shaped pattern as the severity of the crisis abated.
In early 2025, the S&P 500 raced to new all-time highs before peaking in late January/early February, only to get dragged down in March and April by a geopolitical crisis (tariffs/Liberation Day), before rallying in a V-shaped pattern as the severity of the crisis abated.
The market turned on the afterburners. The S&P 500 made up all the March losses and catapulted to a brand new high in a remarkably short time. It’s a market that sure looks like it wants to go higher. But stocks are being held back this week by more war uncertainty.
The current ceasefire with Iran expires on Wenesday night. Talks may not happen, and war talk is growing. The resumption of the war will almost certainly prompt a decline in the market. Aside from that near-term threat, investors are clearly looking past this war. Hopefully, it won’t last much longer.
The current ceasefire with Iran expires on Wenesday night. Talks may not happen, and war talk is growing. The resumption of the war will almost certainly prompt a decline in the market. Aside from that near-term threat, investors are clearly looking past this war. Hopefully, it won’t last much longer.
Alerts
We learned this morning that one of our holdings dismissed its auditing firm and hired another to take over. At the same time, the company’s CFO has resigned, citing “personal reasons.” I think that’s a load of bull.
Crista reviews the GameStop (GME) earnings report.
GameStop (GME) reported fourth-quarter and full-year 2016 results after the market closed yesterday.
Canaccord Genuity recently upgraded this social media stock to ‘Buy’.
I changed a number in yesterday’s Special Bulletin discussion about the S&P 500, and I failed to subsequently adjust the percentages, so I wanted to issue an update with the correct percentages as they pertain to increases in the S&P’s value.
Our first pick today is a tech fund whose five largest holdings are: Apple Inc (AAPL, 17.47% of assets); Microsoft Corp (MSFT, 11.90%); Facebook Inc A (FB, 7.59%); Alphabet Inc A (GOOGL, 5.98%) and Alphabet Inc C (GOOG, 5.84%).
I don’t think oil prices are going to revisit the lows of the bear market, but the recovery likely has stalled for a year or more. The fund returned 15.95% over the last 12 months.
There’s nothing abnormal happening in the market. Stocks don’t go straight up, rather, they bounce around, whether the general trend is up, down or sideways. That said, it’s a little premature to buy low now because most stocks that are having pullbacks have not bottomed yet.
I’m closely watching our newest position, which recently reported results and is now trading right around the 9.5 to 10 level. The current trading range should represent a nice entry point to add to existing positions, but we’ll need a little support from the broad market to prevent a drop into the low 9s.
Guggenheim just raised the rating of this retailer’s shares to ‘Buy’. In the past 30 days, 19 analysts have increased their earnings forecasts for the company for 2017 and 14 for 2018.
We are downgrading this stock from the Buy and Long-Term Buy lists after the company posted a disappointing December quarter and gave mixed guidance for 2017.
The market suffered its worst day in months today, with the Dow down 238 points and the Nasdaq finished down 108 points.
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 Top Ten 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 Top Ten features.