Current Market Outlook


The market’s two-plus-week rally hit a wall last week, with the major indexes suffering three days in a row of distribution (higher volume selling), that caused most to fall back below their 50-day lines. That’s reason enough to remain relatively cautious—we’re keeping our Market Monitor in neutral territory. On the flip side, though, is the action of leading stocks, a ton of which are actually pushing higher despite the market’s wobbles! Of course, good-looking stocks can go bad in a hurry in a bad market, but there’s no question this broad resilience (including a slew of solid earnings reactions) is very encouraging. Our thought is to pick up a few shares of some potential winners of the next leg up, but because of the market, do so in small amounts, while continuing to hold a chunk of cash on the sideline.

This week’s list is chock-full of strong growth stocks (and a couple of old world stocks, too). It’s hard to narrow down our choice to just one, but we’re going with Proofpoint (PFPT), which looks like a mid-cap leader in the newly strong cybersecurity group.

Stock Name	Price	Buy Range	Loss Limit
Coupa Software (COUP)	262.20	44-46	39-40.5
Etsy (ETSY)	112.97	22.5-25.5	21-22.5
Lumentum (LITE)	87.00	61-64	55-57
MercadoLibre, Inc. (MELI)	980.83	375-395	345-355
The New York Times Company (NYT)	0.00	23-24.5	21-22
Proofpoint (PFPT)	113.79	110-114	100-103
Salesforce.com (CRM)	0.00	117-121	108-111
Splunk (SPLK)	207.67	98-102	90-92
United States Steel Corporation (X)	0.00	42.5-45.5	37-39
Veeva Systems (VEEV)	180.23	72-76	65-67.5

We’re adding a pure-play security solutions provider to Cabot Small-Cap Confidential to increase our security software exposure. This company is growing revenue well over 20% and is expanding its portfolio of solutions to address large and rapidly growing markets.

We’re clearing one underperforming stock from the portfolio today, and putting one dividend stalwart back on Buy. In today’s issue, you’ll also find a very high-yielding new addition, a recap of our sell strategy and updates on all our stocks.

In today’s issue, we talk about some of the clues to identifying abnormal action, which earlier this year led us to sell a couple of stocks that have since been hit hard, while holding onto some leaders that are beginning to re-emerge. It’s an art as much as a science, but we think the discussion will help you hold your highest-potential holdings through tough corrections.

The market rebound over the past few weeks has been very impressive; it’s now turned our intermediate-term timing indicator back to positive. But buying after such a spike is risky, so today’s recommendation is a beaten-down stock that has nowhere to go but up.

Current Market Outlook


We can’t complain about the market’s action recently—the major indexes have (at the very least) held the strong gains of the past couple of weeks, with the strongest among them (like the Nasdaq) pushing higher. And many individual stocks (especially growth stocks) look vibrant, which is a plus. That said, we can’t conclude that the bulls are back in control, as most major indexes are still hovering around their 50-day lines, and in the broad market, the number of stocks hitting new highs (even on the strong Nasdaq) remains very low. We’re close to an all-clear signal, and think it’s fine for you to hold your strong stocks and do a little buying here or there. But right now, we’re keeping our Market Monitor at neutral until we see confirmation of an uptrend.

This week’s list has a ton of good stories and charts, with growth stocks well represented. It’s hard to pick just one, but we’ll go with Red Hat (RHT), which looks like a big-cap leader of the leading software group.

Stock Name	Price	Buy Range	Loss Limit
Arch Coal (ARCH)	82.27	95-99	87-89
GoDaddy (GDDY)	0.00	58-61	53-55
MuleSoft (MULE)	0.00	28.5-30.5	26-27.5
Netflix, Inc. (NFLX)	423.92	280-290	255-260
Planet Fitness (PLNT)	0.00	34-36.5	31-32.5
Red Hat (RHT)	0.00	142-148	130-134
TAL Education (TAL)	50.49	35-37	32-33
Twilio (TWLO)	183.39	31.5-33.5	28-29.5
Vale S.A. (VALE)	15.40	13.7-14.5	12.6-13
Zendesk (ZEN)	82.19	40.5-42.5	36.5-38

Emerging market stocks have followed the lead of the major U.S. indexes by executing a V-shaped bounce from their January/February slump and most of our stocks are in good shape. We’re keeping an eye on Chinese New Year as an economic force and on the battle between Alibaba and Tencent/JD.com for leadership in the Chinese online retail race. And we have a high-flying Chinese biopharmaceutical company to fit into the portfolio.

While the market’s volatility increases the need for selective stock picking, it also presents some fantastic opportunities to buy stocks whose shares have been discounted through no fault of their own. Our contributors are pouncing on those ideas.

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.

Sell Amazon.com (AMZN); Applied Materials (AMAT) moves from Buy to Hold; ASML Holding (ASML) moves from Buy to Hold; D.R. Horton (DHI) moves from Buy to Hold; Royal Caribbean (RCL) moves from Buy to Strong Buy; and quarterly and holiday earnings results for Mattel (MAT), Royal Caribbean (RCL), Vertex (VRTX) and Whirlpool (WHR).

Skyworks Solutions (SWKS 91.60) reached its Minimum Sell Price of 92.81 today and should be sold

Since the S&P 500 is reaching new highs and some of our stocks are making significant moves this week, I thought I’d review those with you today.

Here are some portfolio notes, for those of you who like to assess your stocks over the weekend. Energy stocks are having what appear to be normal pullbacks. Take advantage of the lower prices, and buy BP plc (BP), ExxonMobil (XOM), Total (TOT) and Tesoro (TSO).

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.