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.

Current Market Outlook


The 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	Buy Range	Loss Limit
Chegg (CHGG)	74.21	21-22	19-19.5
Continental Resources (CLR)	66.19	56.5-58.5	52-54
Floor & Décor (FND)	68.03	49-51	45.5-47
Fortinet Inc. (FTNT)	137.53	51.5-54	47.5-49
HealthEquity, Inc. (HQY)	70.70	61.5-63.5	55.5-56.5
Netflix, Inc. (NFLX)	423.92	307-322	280-285
PagSeguro Digital (PAGS)	35.09	35-37	31-33
Penumbra Inc. (PEN)	173.25	116-120	106-108
Red Hat (RHT)	0.00	146-153	135-139
ServiceNow (NOW)	341.86	167-172	155-158

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.

Current Market Outlook


The 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	Buy Range	Loss Limit
AAXN (AAXN)	87.11	36-38	32.5-34
Baozun (BZUN)	44.24	45.5-48.5	41.5-43.5
HCA Healthcare (HCA)	137.60	100-104	94-96
Insulet (PODD)	175.69	82-84.5	75-77
Loxo Oncology (LOXO)	186.59	115-120	104-107
MKS Instruments (MKSI)	109.43	117.5-122.5	107-110
Nutanix (NTNX)	55.91	49-52	44-46
Pegasystems (PEGA)	0.00	59-61	55-56
PTC Therapeutics (PTCT)	0.00	27.5-29.5	25-26.5
Vipshop Holdings (VIPS)	14.25	17-18.5	15-16

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 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.

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.

Fortress Investment (FIG 8.00) will be acquired by Japan’s SoftBank for $8.08 per share, all cash, and the stock has reached my sell target. Quest Diagnostics DGX 94.70) reached my Min Sell Price of 94.87 this morning.

I’m recommending the sale of Applied Materials (AMAT – yield 1.1%). The stock is up about 35% since joining the Growth Portfolio in August 2016.

Lots of earnings reports. Here are this week’s noteworthy pieces of news and price action in the Cabot Undervalued Stocks Advisor portfolios.

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.