Issues
The market had a great, bullish setup a couple of weeks ago, but that rally has fallen flat, which is a red flag. Our Cabot Tides and Two-Second Indicator remain negative, and we’re now seeing the selling spread even to resilient growth stocks.
The broad market has gotten jumpy again, but it’s no reason to panic. In today’s issue, we review why dividend stocks are better in downturns, add a conservative-aggressive stock to the Safe Income tier, and have earnings updates on all our stocks (four have already reported; the rest will over the next week.)
The long-term trend of the market remains up, but increasingly, it pays to be nimble. For today’s recommendation, that means jumping on the start of a new uptrend after an excellent earnings report.
Current Market OutlookThe market backed off late last week, but the overall picture hasn’t changed much—following a successful retest of the February lows, the major indexes are in a solid rally attempt, but that rally has yet to turn the intermediate-term trend up, either for the indexes or for the majority of leading stocks. There are many encouraging signs, and if the market rallies from here, the trend could turn up later this week; we’re ready and waiting for an all-clear signal should it come. But we learned long ago not to anticipate signals—right now, the trend is mostly sideways, few stocks are running away on the upside (most that have perked up fall back quickly) and most companies are set to report earnings over the next three weeks. Thus, we advise sticking with a cautious stance, which means holding some cash and keeping new positions on the small side.
This week’s list has a wide variety of stocks and sectors, all of which have shown great relative strength. Our Top Pick is Cheniere Energy (LNG), which has a unique story and a stock that’s built a great-looking base. Earnings are out soon, so start small.
| Stock Name | Price | ||
|---|---|---|---|
| Abercrombie & Fitch (ANF) | 15.37 | ||
| Autohome (ATHM) | 98.65 | ||
| Cheniere Energy (LNG) | 63.82 | ||
| E*Trade Financial (ETFC) | 0.00 | ||
| First Solar (FSLR) | 83.74 | ||
| InterXion (INXN) | 0.00 | ||
| Loxo Oncology (LOXO) | 186.59 | ||
| Netflix, Inc. (NFLX) | 423.92 | ||
| Pioneer Natural Resources (PXD) | 0.00 | ||
| TransUnion (TRU) | 83.09 |
In this kind of so-so atmosphere, we are taking exactly what the market hands us and making decisions based on what the charts show us. That means a little selling today, but we also have an exciting and very new stock for our watch list. Read on for all the details.
The market seesaw continues, but overall, we’re trading at about the same levels as this time last month.
The most recent retail sales report showed improvement, as did housing starts. And with the unemployment rate and job openings steady, the economy continues on a positive trend. First quarter earnings—so far—look good, and the S&P 500 forward P/E of 16.4 tells us that values are not overblown.
The most recent retail sales report showed improvement, as did housing starts. And with the unemployment rate and job openings steady, the economy continues on a positive trend. First quarter earnings—so far—look good, and the S&P 500 forward P/E of 16.4 tells us that values are not overblown.
The long-term trend of the market remains up, while the intermediate trend remains down, though the current rally is working to change that—and may well succeed. In any case, we’re seeing growing numbers of strong stocks, and today’s recommendation is one of them.
It’s a little-known technology stock providing a valuable public service, with a high rate of recurring income. I think you’ll like it.
It’s a little-known technology stock providing a valuable public service, with a high rate of recurring income. I think you’ll like it.
Current Market OutlookThe positives are starting to accumulate when you’re talking about some secondary measures of the market’s performance—many growth stocks are holding up well, the broad market showed positive divergences when the indexes retested their February lows and the market’s clearly shrugged off a bunch of bad news. All of that is encouraging, and we’re nudging our Market Monitor up a notch in response. However, we’re still advising a relatively cautious stance because the market’s intermediate-term trend hasn’t turned up; most major indexes are still below key moving averages and, at best, are basically stuck in the middle of three-month trading ranges. We’re still in favor of giving your resilient stocks a chance to get going, and we don’t think the evidence supports being outright defensive. But holding some cash on the sideline, picking entry points carefully and/or keeping new positions on the small side still make sense.
This week’s list has many stocks that have staged breakouts (or come close) in recent days, even as the market is still iffy. Our Top Pick is WPX Energy (WPX), one of many oil stocks that’s come to life as that sector sets up.
| Stock Name | Price | ||
|---|---|---|---|
| Alcoa (AA) | 0.00 | ||
| Coupa Software (COUP) | 262.20 | ||
| Fiat Chrysler (FCAU) | 0.00 | ||
| GoDaddy (GDDY) | 0.00 | ||
| Heron Therapeutics (HRTX) | 35.25 | ||
| HollyFrontier Corporation (HFC) | 0.00 | ||
| Melco Resorts (MLCO) | 0.00 | ||
| RingCentral (RNG) | 238.73 | ||
| Semtech (SMTC) | 51.09 | ||
| WPX Energy (WPX) | 0.00 |
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
Costco (COST) opened 4% lower today following the company’s second-quarter report, which missed estimates.
Today’s special bulletin brings news on one of our stocks, followed by brief comments on additional portfolio stocks.
Analysts expect this stock to earn $3.48 a share, on sales of $4.08 billion, when it reports today.
We’re enjoying better-than-expected results from reporting companies this week. Here’s my quick take on three Cabot Small-Cap Confidential positions that have recently reported.
For 2017, 12 analysts have increased their earnings estimates for this home builder, and the stock was recently upgraded by FBR & Co. to ‘Outperform’ and by BofA/Merrill, to ‘Buy’.
GameStop (GME) is about 5% lower today after Target (TGT) reported earnings that missed estimates and issued disappointing guidance. Other store-based retailers are also pulling back today. Analysts fear that Target stores’ lower traffic and comp sales are a bellwether for other brick-and-mortar retailers.
This telecom company beat analysts’ estimates by $0.12 last quarter, and Wall Street is forecasting triple-digit growth for the company this year.
This Internet of Things company beat estimates by $0.11 last quarter. Analysts expect double-digit growth this year and next, with 11 increasing their 2017 estimates in the past 30 days.
Synchronoss Technologies (SNCR) is the subject of an investigative report published today by the Southern Investigative Reporting Foundation.
12 analysts have increased their 2017 earnings forecasts and seven have raised their 2018 estimates for this telecom company in the past 30 days.
Stockbrokers.com just ranked this brokerage company #1. The shares were recently upgraded to ‘Outperform’ at Credit Suisse and Nomura.
I’m maintaining my rating of Hold Half for the time being. I’ll keep a close eye on the stock and will update you again in Friday’s Weekly Update.
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.