“More investment does not necessarily lead to more innovation.”

“When doing something, experienced people will tell you without hesitation that you should do it this way, but inexperienced people will have to repeatedly explore and think seriously about how to do it, and then find a solution that suits the current actual situation.”

—Liang Wenfeng, founder of the company that created DeepSeek

As has been the case for the past decade, the fate of cannabis stocks lies largely in the hands of politicians.

Cannabis companies have been getting solid support from state-level politicians. Forty states now allow sales of medical cannabis.

Sure, they are permitting too many stores, and that is putting downward pressure on pricing. At some point, the market sorts that out. Prices will fall to a point where it is no longer that enticing to bring on new supply, yet companies will have gotten lean enough to produce profits. We are not there yet. But we will get there.

Lost in the frenzy surrounding all things AI are companies that fall under the “boring but important” category. This includes producers of everyday things we often take for granted but which are nonetheless crucial for the smooth functioning of countless segments of the economy. To be fair, these otherwise “boring” industries quite often provide investors with outsized opportunities for profit due to their under-the-radar nature.

January was shaping up to be another stellar month for stocks. The S&P 500 closed last week 3.73% higher for the month.

But stocks came crashing down on Monday when a Chinese start-up claimed that its highly popular AI assistant performs equally as well as leading models at much cheaper prices and using far less data. It calls into question the anticipated demand growth for AI.

But the selloff is probably an overreaction. This is the problem with high-flying stocks. Any bad news gets dramatically amplified because euphoria is so easy to disappoint. The AI catalyst is still very real. But it may have gotten ahead of itself. A day like Monday was bound to happen. It also creates opportunity.

In this issue, I highlight one of the best technology stocks on the market. It was riding high for good reasons, rapidly growing profits. Monday’s overreaction prompted the worst selloff of the stock in years. There is likely to be a bounce back and the stock can generate very high-priced calls.

Despite some wobbles early in January, the S&P 500 closed at a new all-time high on Thursday. And even though the indexes pulled back marginally on Friday, by week’s end the S&P 500 had gained 1.7%, the Dow had rallied 1.83% and the Nasdaq had added 1.53% (though the Nasdaq got hit again on Monday, led lower by AI stocks).

We’ll let everyone else fight it out over the meaning and truthfulness of the DeepSeek revelations—as always, we’ll stay focused on the actual evidence, and here’s what we see: First off, the broad AI infrastructure areas look very iffy; the odds favor most chips, networking and electricity stocks are in the so-called penalty box. That said, the rest of the market took on water today but didn’t look abnormal. We do view the dramatic action as a yellow flag but we’re also not panicking as many of the names that had begun to perk up/break out are still acting well enough. We think it’s prudent to drop our Market Monitor back to a level 6 and take things on a stock-by-stock basis from here.

This week’s list does have a couple of AI-related names that got whacked, but the rest are from other areas that look fine. Our Top Pick is a name that looks like it’s finally, decisively changed character. Start small and aim for dips.

Something called DeepSeek out of China helped bring the rally in U.S. stocks to a screeching halt to start the week. Artificial intelligence stocks, in particular, are taking it on the chin, as it appears the Chinese firm may have found a cheaper, just-as-advanced alternative that’s rattling the likes of even Nvidia (NVDA). Chances are, the selling is overdone. But it’s a good time to look for overseas alternatives. And today, we add a Dutch company that plays an essential role in global travel – and one that’s taking advantage of the many missteps of its larger U.S. rival. It’s a stock that was first recommended by Carl Delfeld in Cabot Explorer.

Details inside.

Despite some wobbles early in January the S&P 500 closed at a new all-time high on Thursday. And even though the indexes pulled back marginally on Friday, by week’s end the S&P 500 had gained 1.7%, the Dow had rallied 1.83% and the Nasdaq had added 1.53%.

Despite some wobbles early in January the S&P 500 closed at a new all-time high on Thursday. And even though the indexes pulled back marginally on Friday, by week’s end the S&P 500 had gained 1.7%, the Dow had rallied 1.83% and the Nasdaq had added 1.53%.

After a rough few weeks, the market’s recent rally has been welcome, improving the overall evidence ... though not quite yet in a decisive manner, as the intermediate-term trend is mostly neutral (those close to a buy signal) and many stocks are still toying with resistance. That’s descriptive and not predictive, though, so we did do some buying today, though we’re starting small and will look to build if the buyers stay at it.

Tonight’s issue talks about all of our market thoughts and goes over all of our stocks (including some long-time holdings that are perking up), as well as reviewing a couple of industry groups that are showing intriguing strength after tough down periods.

Before we dive into this week’s idea, let’s clean up some of our January positions, with the headliner being things all worked out well.

January is living up to its volatile reputation but there’s no doubt it’s begun to improve—the intermediate-term trend, which was negative for most everything out there, is back to neutral; the broad market is showing some rapid, intriguing improvement; and individual stocks have improved their standing, with some popping to new highs. To be clear, this isn’t a buying panic, but after a few weeks of tedious action that has brought sentiment down, we’re OK with gradually extending your line while remaining nimble. We’ll up our Market Monitor to a level 7 today.

This week’s list is a mixed bag, with everything from growth to turnarounds to commodity names. Our Top Pick looks like one of the leaders of a new group move after being in the doghouse for a couple of years. Try to get in on dips.

WHAT TO DO NOW: Today is an ugly day for growth stocks, with sellers driving many stocks lower as the Nasdaq and some mega-cap winners wobbled. That said, the evidence is basically the same—very mixed and divergent on an intermediate-term basis, with some names doing well but much of the market chopping sideways. We think holding a good-sized chunk of cash makes sense given that risk is elevated, but we’re also holding on to our stocks and giving them some room to wiggle around. In the Model Portfolio, we’re watching things closely, but will sit tight tonight, holding our 30% cash position.

With the Juneteenth Holiday this week and our last update just three business days ago (and right after the FOMC meeting), there is very little to talk about today. So, I’ll keep things short and sweet and we’ll jump right into company-specific updates, of which there are hardly any.

In other words, enjoy a break in the action! They rarely last long.

The market is at all-time highs. But most stocks are undervalued.

That’s the strange but true reality in today’s Magnificent 7/AI-centric bull market. Yes, if you’ve invested in the seven largest mega-caps or a handful of artificial intelligence-related stocks (Broadcom (AVGO), Palantir (PLTR), Super Micro Computer (SMCI), Taiwan Semiconductor (TSM), etc.), you’ve done quite well. But most other sectors have lagged.

This market just continues to forge ever higher. The S&P 500 closed at new all-time highs four times last week. The index is now up 15% YTD, and we’re not even at the halfway point.

Just when it looked like the rally was petering out, the market is having a great June so far. The S&P is up about 5% in June after making four consecutive record closes last week. The index is now up 14% so far this year, and it’s not even half over.

Ammo Inc (POWW) beat on revenue of $40.42M but its EPS of $0.01 per share missed expectations by $0.03. The company experienced sequential revenue growth in the ammunition segment and maintained robust margins in the GunBroker marketplace, but total revenues and gross profit margin were both down year-on-year, influenced by a shift in sales mix and macroeconomic pressures. The year ended with substantial operational cash flow and an improved net working capital position including $55.6M in cash, positioning the company for future growth.

Small caps are off ever so slightly over the last five sessions, though yesterday’s CPI data and Jerome Powell’s press conference/FOMC meeting helped the asset class bounce back from what was a fairly ugly looking four-day slide. The big-picture takeaway here is that the asset class is suffering from the same type of bad breadth malaise that’s keeping a lid on much of the broader market.

Good enough.

That was the resounding sentiment on Wall Street after Wednesday morning’s inflation print came in slightly better than expectations … but still stubbornly above 3% year over year. The headline CPI number for May, 3.3% year over year, was just below the 3.4% economists anticipated; the month-over-month increase (0.2%) was also a bit lighter than expected (0.3%).

Inflation cooled for the second straight month in May, the U.S. labor market seems back to pre-pandemic levels, and the economy is expanding at a low but steady pace.

Therefore, the Fed is holding back on interest rate cuts. Probably the right move. Keep the ammo dry for when it is really needed. This was a solid week for Explorer stocks with all making gains except for a small pullback in Super Micro (SCMI).

Since Halloween, the last seven times I have made a call in Cabot Cannabis Investor to buy the AdvisorShares MSOS 2X Daily (MSOX) in sector weakness, the exchange-traded fund has gone up 68% on average over the next one to seven weeks.

The last time I made a trading call to buy the cannabis sector was on May 29.

Since that was less than two weeks ago and the maximum time to profit after trading calls is seven weeks, I am not too concerned about the flat performance of cannabis stocks since then.

It’s a new high! April was down. May was up. And June has been an up month so far. Hopefully, June will follow through and be another good month, but I’m still expecting a flatter market for a while.

The market goes back and forth with the interest rate narrative. But I don’t expect a resolution on that issue any time soon, or at least for the rest of the summer. Either the economy has to slow, or the Fed is going to at least leave rates where they are. But investors still insist on expecting rate cuts before the end of the year even though the economy looks strong.

Earnings season is largely over, so there were no companies that reported earnings this past week. However, we do have at least one company reporting next week – Ammo, Inc. (POWW). And the next earnings season is frankly just around the corner, with Walgreens Boots Alliance (WBA) announcing they’ll release their next round of results the last week of the month.

Okay, it’s that time of year. We are going to close out a few of our Dogs and Small Dogs of the Dow positions today and early next week. Once that is complete, we simply wait until the first week of 2024 to initiate our new Dogs and Small Dogs positions (and several others across various portfolios).

I wanted to repeat, one last time, what was stated in the alert yesterday.

We have several positions that need to be rolled to higher strikes. The deltas of our LEAPS contract and short calls are at parity, so I want to buy back my short calls and sell more further out in duration and at a higher strike price.

We have several positions that need to be rolled to higher strikes. The deltas of our LEAPS contract and short calls are at parity, so I want to buy back my short calls and sell more further out in duration and at a higher strike price.

We’ve managed to lock in a return of 36.1% in BITO. Not many can say they’ve made money in BITO since the beginning of June 2022. Just another reason why more and more individual investors are flocking to the tried-and-true income wheel approach.

Docebo (DCBO) Tender Offer Thoughts

There is little to no value left in our XLU December 15, 2023, 56 puts. As a result, I’m going to buy them back, lock in profits and immediately sell more premium. I’ll be doing the same in a few other positions as we move throughout the week.

Before I get to our trade in TTE, I just wanted to remind everyone that, per our strategy guidelines, we will be exiting our Dogs and Small Dogs positions over the next two weeks, prior to the December 29, 2023 expiration cycle. I’ll be reentering the new Dogs and Small positions at the onset of 2024. Moreover, I plan to discuss a new variation on how to approach the Dogs.

Today, a whopping eight Profit Booster positions will expire. Most are “slam-dunk,” full-profit trades, while others will go down to the wire.

The big takeaway, before we dive in, is we are going to let the situation play itself out, and come Monday/Tuesday of next week we will revisit our profits, as well as how we will manage the remaining positions.

We have a few more December 15, 2023 positions to roll into the January/February expiration cycle. I will most likely get out of those (DBC, VNQ, TTE, etc.) later this afternoon. Stay tuned!

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.