Issues
After a brief shakeout last Monday, supposedly on fears that Italy would leave the EU, the market reversed course and has been pushing higher and higher since, supposedly cheering on the continued strong performance of the U.S. economy.
I’m enjoying the ride, and I assume you are, too. But I must remind you that good news is prevalent at market tops, while bad news is what you wallow in at market bottoms. So keep your eyes on the exits—while continuing to hold the best stocks as long as the market supports them.
I’m enjoying the ride, and I assume you are, too. But I must remind you that good news is prevalent at market tops, while bad news is what you wallow in at market bottoms. So keep your eyes on the exits—while continuing to hold the best stocks as long as the market supports them.
The introduction features a few international trade issues, including disputes about international court systems within NAFTA and CETA, and a potential sunset clause in NAFTA. I’d go on to itemize which steel companies might benefit or be harmed by the latest round of steel tariffs, but I frankly believe that last week’s newest steel tariffs are simply a temporary negotiating ploy pertaining to NAFTA. Therefore, I thought it might be more useful to discuss what’s currently happening with NAFTA negotiations.
Current Market OutlookWhile the action of most major indexes wasn’t overwhelmingly positive last week (the S&P 500 was up about 0.5%), there was a bunch of constructive action—the major indexes shook off three big worries (Italian and Spanish political uncertainties and new tariff threats) and some pushed above near-term resistance, with growth-oriented stocks leading the way. There are still many potential potholes out there, including divergences (and overhead) in the major indexes and investor sentiment that’s a bit complacent. However, the primary evidence (trends of the indexes and price/volume action of leading stocks) continues to improve. We’re bumping our Market Monitor up a couple of notches into bullish territory and, while you shouldn’t force it, you can look to take a more positive stance going forward.
This week’s list has a ton of growth-y stories, and even those that have more sturdy stories have recently staged excellent breakouts. Our Top Pick is GDS Holdings (GDS), a smaller Chinese firm with an excellent story. The recent pullback looks like a decent entry point.
| Stock Name | Price | ||
|---|---|---|---|
| Alibaba (BABA) | 254.81 | ||
| Align Technology (ALGN) | 316.20 | ||
| Canada Goose Holdings (GOOS) | 46.21 | ||
| Cheniere Energy (LNG) | 63.82 | ||
| Chipotle Mexican Grill (CMG) | 773.32 | ||
| GDS Holdings Limited (GDS) | 80.15 | ||
| Keysight Technologies, Inc. (KEYS) | 97.20 | ||
| Loxo Oncology (LOXO) | 186.59 | ||
| Novocure (NVCR) | 0.00 | ||
| Tiffany & Co. (TIF) | 132.10 |
While thinking about how to frame this month’s small-cap opportunity I was hit by the memory of a Ted Talk I heard last winter. The talk features organizational psychologist Adam Grant describing what he calls “originals”—thinkers who dream up new ideas and then do what it takes to put them into action.
Emerging market stocks aren’t doing all that well, but Chinese ADRs are showing considerable strength. That’s the bad-news/good-news summary of today’s commentary. And the theme continues in today’s issue, where we’re adding a stock that has been on a breakout run since the middle of May. Our timing wasn’t right when we took our first position in the stock in late 2017, but the recent rally is offering us a second chance, if we can get the timing right. For the tantalizing details, read on!
The market has gotten “exciting” again, for better or worse. In today’s issue we’re making lemonade from lemons, adding a medical REIT to the high yield tier.
Over the past few weeks, the market has given us a bunch of presents—and now the market is trying to take some of our presents away. But this should come as no surprise. The only “surprise” is what excuse the media finds to pin the blame on, whether it’s China or Russia or Italy or interest rates or Trump or simply an economy that’s too good to last.
I’ll leave the finger-pointing to someone else. Instead, I’ll keep picking high-potential stocks and managing the portfolio to maximize gain and minimize risk.
I’ll leave the finger-pointing to someone else. Instead, I’ll keep picking high-potential stocks and managing the portfolio to maximize gain and minimize risk.
Current Market OutlookThere’s been a bunch of news during the past few trading days, including this morning’s revelation that a likely autumn Italian election could threaten the euro, as well as continued China trade shenanigans, both of which attracted sellers. Today’s move did put a dent in a couple of indexes—the NYSE Composite’s intermediate-term green light went up in smoke, for instance—but the other indexes continue to hold most of their early May gains. Much more selling from here could put a fork in this rally, so our antennae are up. But right here, we are still leaning bullish though we are knocking our Market Monitor down a notch. Thus, continue to hold your resilient performers, but don’t forget to take some partial profits when you have them and hold some cash until the buyers truly take control.
This week’s list has an array of ideas from various corners of the market. Our Top Pick is Carpenter Technologies (CRS), a specialty metals firm with huge earnings estimates and whose stock is hitting new highs.
| Stock Name | Price | ||
|---|---|---|---|
| Carpenter Technology (CRS) | 53.25 | ||
| Foundation Medicine (FMI) | 136.68 | ||
| iQIYI (IQ) | 0.00 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Macy’s, Inc. (M) | 36.36 | ||
| Micron Technology, Inc. (MU) | 43.31 | ||
| PBF Energy (PBF) | 38.93 | ||
| Turtle Beach (HEAR) | 26.70 | ||
| WTW (WTW) | 100.47 | ||
| ZTO Express (ZTO) | 28.84 |
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
The recent rough patch in the market has taken a toll on two of our stocks. And while the Cabot Emerging Markets Timer is still positive, the iShares MSCI Emerging Markets ETF on which it is based experienced a reversal on March 21, and has been trading flat and tight for more than a week. Accordingly, we are going to sell one of our holdings that has buckled under selling pressure and put another on Hold.
This mining company’s EPS estimates are rising. Six analysts have increased their forecasts in the past month, and they expect the company to post triple-digit growth this year.
The stars don’t always spell success, as this foreign fund—our first idea today—demonstrates.
Our recommendation is a sale of a biotech with disappointing quarterly results.
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.
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.