Issues
Despite the recent dicey market, there are two great opportunities created by a weird interest rate move that is likely to correct itself in the months ahead.
The yield curve, defined as the difference between short- and long-term interest rates, has flattened as the benchmark 10-year Treasury rate has fallen. The rate has fallen from 1.75% in February to the current 1.31%, despite the stronger economy and persistent inflation.
I believe rates have moved far too low. Interest rates are still well below what has been defined as normal for the last decade. The 10-year rate is still well below the pre-pandemic level. Plus, the benchmark rate averaged between 2% and 3% during both the Obama and Trump Administrations.
Interest rates have fallen too far and are likely to trend higher in the months ahead. Two portfolio stocks benefit from the difference between short and long rates and have been held back by the falling rates. These stocks are likely to move higher as the situation reverses
The yield curve, defined as the difference between short- and long-term interest rates, has flattened as the benchmark 10-year Treasury rate has fallen. The rate has fallen from 1.75% in February to the current 1.31%, despite the stronger economy and persistent inflation.
I believe rates have moved far too low. Interest rates are still well below what has been defined as normal for the last decade. The 10-year rate is still well below the pre-pandemic level. Plus, the benchmark rate averaged between 2% and 3% during both the Obama and Trump Administrations.
Interest rates have fallen too far and are likely to trend higher in the months ahead. Two portfolio stocks benefit from the difference between short and long rates and have been held back by the falling rates. These stocks are likely to move higher as the situation reverses
Last week the major indices took another small step backwards. The S&P 500 lost 0.57%, the Dow fell 0.06%, and the Nasdaq declined 0.41%.
The decline deepened among all the major indices Monday as ongoing uncertainties around Chinese property developer Evergrande heightened. Evergrande faces a debt payment on its offshore bonds Thursday, so until some clarity is seen I would expect to see further volatility.
The S&P 500 has now witnessed a 4.4% decline since the closing highs back on September 2. So the 5% pullback everyone has been discussing over the past several weeks could come to fruition over the next few trading sessions.
To be more defensive, this week I am going to sell in-the-money calls to stay a bit on the safe side.
The decline deepened among all the major indices Monday as ongoing uncertainties around Chinese property developer Evergrande heightened. Evergrande faces a debt payment on its offshore bonds Thursday, so until some clarity is seen I would expect to see further volatility.
The S&P 500 has now witnessed a 4.4% decline since the closing highs back on September 2. So the 5% pullback everyone has been discussing over the past several weeks could come to fruition over the next few trading sessions.
To be more defensive, this week I am going to sell in-the-money calls to stay a bit on the safe side.
The bull market remains intact, despite this morning’s sharp selloff, so I continue to recommend that you be heavily invested in stocks that help achieve your investing goals.
Today’s featured stock is a very conservative one, a solid financial institution with a good dividend, and the prospect of growing earnings as interest rates rise.
As for the current portfolio, there are no changes. It will be interesting to see which stocks bounce best after the selling pressures ease.
Today’s featured stock is a very conservative one, a solid financial institution with a good dividend, and the prospect of growing earnings as interest rates rise.
As for the current portfolio, there are no changes. It will be interesting to see which stocks bounce best after the selling pressures ease.
Current Market OutlookOur intermediate-term trend model has effectively been neutral for months, with the big-cap indexes acting pretty well but most other areas chopping sideways. Today, though, the sellers got their act together, with the S&P 500 decisive diving below its 50-day line and small caps actually falling below their 200-day line! That’s certainly a change in character and, for the first time in months, turns the intermediate-term trend down. Of course, the evidence hadn’t quite lined up for a while now, so we’ve been playing it more cautiously than normal, but now it’s time to step carefully and see how this plays out. As for positive tidings, there are some: The bad news out there (Chinese real estate) is obvious, and looking at individual stocks, many growth titles are now holding up far better than the Dow or S&P 500 (a marked change from earlier this year). Thus, we’re still holding our resilient names and are OK doing a little buying as stocks pull in to support, but it’s not time to be a hero, with the focus shifting more toward preserving capital. Our Market Monitor has moved to a level 5.
If you are aiming to put a little money to work, you want to look for names that have recently shown good-volume buying. Happily, this week’s list has many names in this club, and our Top Pick is Lululemon (LULU), which is emerging from a long rest and has held its recent earnings gap despite the market’s dip.
| Stock Name | Price | ||
|---|---|---|---|
| Align Technology (ALGN) | 710 | ||
| Catalent Inc (CTLT) | 136 | ||
| Chesapeake Energy Corporation (CHK) | 60 | ||
| Cloudflare (NET) | 127 | ||
| Entegris (ENTG) | 129 | ||
| KKR & Co. L.P. (KKR) | 62 | ||
| Lending Club (LC) | 27 | ||
| Lululemon Athletica (LULU) | 420 | ||
| Natera (NTRA) | 120 | ||
| Wingstop (WING) | 182 |
U.S. stocks struggle a bit to regain momentum as Hong Kong’s Hang Seng and China’s Shanghai Composite contract. Investors seem to be taking a close look at valuations as markets from Japan to Europe trade at lower valuations. The big $3.5 trillion spending bill is spooking U.S. markets and splitting U.S. Senators. Today our new recommendation is a play on the aging baby boomer generation, which will increasingly require more medical attention.
A continued mixed bag of signals from Greentech still yields some good stocks to profit with. We’ve been muddling through “two steps forward and one step back” kind of action, which means today’s market may seem bad, but the bigger picture keeps improving. The key is to continue to be diligent about avoiding weak stocks and search for good fundamental underpinnings to chart moves with the strong ones. The market is slowly laying the groundwork for the next leg of Greentech’s bull move.
This issue, we’re returning to a segment of Greentech that was red hot for a brief period before simple bad luck turned investors against it for years. The sector recently broke through long-held resistance. That’s a plus. Our featured stock has a monopoly on parts of its market. It’s nicely priced for its existing business already, but its shift into next-generation technology suggests huge opportunities ahead – that’s a big plus.
We also have newly recommended ratings, suggested buy ranges for a couple, and updated sell-stops for many of our current portfolio holdings. We also now have “sell” call on one holding which has broken through support.
Read through for more details.
This issue, we’re returning to a segment of Greentech that was red hot for a brief period before simple bad luck turned investors against it for years. The sector recently broke through long-held resistance. That’s a plus. Our featured stock has a monopoly on parts of its market. It’s nicely priced for its existing business already, but its shift into next-generation technology suggests huge opportunities ahead – that’s a big plus.
We also have newly recommended ratings, suggested buy ranges for a couple, and updated sell-stops for many of our current portfolio holdings. We also now have “sell” call on one holding which has broken through support.
Read through for more details.
Last week all the major indices took a small step back. The S&P 500 lost
1.69%, the Dow fell 2.15%, and the Nasdaq declined 1.61%.
The headlines say the 5-day pullback was the largest for the S&P 500 since February. But considering that the streak of over 230 days without a 5% pullback is still in play, the short-term bearish stretch last week was minimal.
And even with the slight pullback last week, my sentiment has not changed. I remain
“cautiously optimistic” until I see market action that changes my mind.
Of course, if we see further continuation of the recent bearish trend, I might begin to shift my outlook. But a week doesn’t make a trend, and again we must remember we are only a few percentage points from all-time highs.
1.69%, the Dow fell 2.15%, and the Nasdaq declined 1.61%.
The headlines say the 5-day pullback was the largest for the S&P 500 since February. But considering that the streak of over 230 days without a 5% pullback is still in play, the short-term bearish stretch last week was minimal.
And even with the slight pullback last week, my sentiment has not changed. I remain
“cautiously optimistic” until I see market action that changes my mind.
Of course, if we see further continuation of the recent bearish trend, I might begin to shift my outlook. But a week doesn’t make a trend, and again we must remember we are only a few percentage points from all-time highs.
The bull market remains intact, so I continue to recommend that you be heavily invested in stocks that help achieve your investing goals.
Today’s featured stock is a small company that’s growing fast and that has huge growth potential as the market for intelligent vision systems booms.
As for the current portfolio, most of our stocks look good, and many are hitting new highs, but I have two sells, Supreme Brands (SPB) and Trulieve (TCNNF).
Details inside.
Today’s featured stock is a small company that’s growing fast and that has huge growth potential as the market for intelligent vision systems booms.
As for the current portfolio, most of our stocks look good, and many are hitting new highs, but I have two sells, Supreme Brands (SPB) and Trulieve (TCNNF).
Details inside.
Current Market OutlookDuring the last couple of weeks of August, more stocks, sectors and indexes were getting in gear, which was a change from the past few months of whippy crosscurrents. But as September has progressed, it looks like we’re still in the same overall environment—growth stocks, indexes and funds have again taken hits while some cyclical/value areas have perked up. That’s not necessarily a negative (at least to this point); as we wrote last week, some retrenchment among extended growth stocks was half-expected, and even if it wasn’t, the action is more a confirmation that the choppy environment is still intact, not that the sellers are truly taking control. Long story short, we’re still sticking with the same game plan as the evidence remains unchanged—we’re more bullish than not, but booking partial profits into strength, raising stops as things head higher and aiming to enter on dips is the right way to go.
This week’s list is lighter on growth stocks than in recent weeks, reflecting some of the dents they’re taking, but there are many other names that look to be resuming their advances. Our Top Pick is Antero Resources (AR), which looks like the best play in the natural gas space. Aim to enter on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Antero Resources (AR) | 17 | ||
| Celsius Holdings (CELH) | 87 | ||
| DOCN (DOCN) | 76 | ||
| ICU Medical (ICUI) | 240 | ||
| Innovative Industrial Properties (IIPR) | 228 | ||
| MongoDB (MDB) | 485 | ||
| Pure Storage (PSTG) | 26 | ||
| SBLK (SBLK) | 24 | ||
| Teck Resources Limited (TECK) | 25 | ||
| Varonis Systems (VRNS) | 68 |
Updates
Our Cabot Tides are yet to flash a green light, and thus we’re content to hold our strong, profitable stocks, but also to keep a chunk of cash on the sideline.
The market found its mojo after the Fed vaguely insinuated that it could conceivably consider cutting rates before the end of the year. But it looks like the momentum is gone.
We’re looking at economic data that could push interest rates upward (rising food price inflation and business expansion) and we’re also looking at economic data that could push rates downward (GDP potentially falling due to China tariffs, and slowing employment numbers).
Emerging markets (EEM) and Chinese stocks in particular continue to struggle a bit this week. The EEM is trading right at its 200-day moving average and below its 50-day moving average so the portfolio remains in a defensive stance.
Amidst the uncertainty investors are gravitating toward dividend stocks. You’re in the right place at the right time.
Altogether it felt like a calm week. Considering the worsening performance of the S&P 600 Small Cap Index, which broke below its comfort zone, and the S&P 500, now 6% off its high, our portfolio’s resiliency continues to stand out.
Our Cabot Tides are still clearly negative, and in recent days the selling pressure has broadened out, causing more stocks and sectors to take on water.
Looking at the broad market we see that the S&P 500 is just 4% off its recent high, has thus far held above support around 2,800 and remains above its long-term (200-day) moving average line. The Nasdaq dipped to its May 13 low near 7,627, but it too is above its long-term moving average line.
Emerging and global markets struggled this week as our Emerging Market Timer remained negative, with the EEM clearly trading below its 20-day and 50-day moving averages.
A potential positive catalyst has turned distinctly negative—a swing and a miss. What does this mean for the market going forward?
Many of our stocks are still recovering from the steep stock market downturn that occurred in the fourth quarter of 2018. As long as their fundamentals (profits, valuation, etc.) remain strong, I’m going to give those stocks some rope and allow them to recover.
Alerts
This accessories manufacturer/retailer is trading at discounted levels.
This portfolio stock reported last night that Q4 revenue rose 20.6% to $43.5 million (beating by $1.7 million) and that adjusted EPS of -$0.21 beat by $0.07.
The market has been tripped up by what seems to be an overreaction to the potential economic disruption of the coronavirus, but which is more likely the result of a trifecta of potential issues including coronavirus, a previously elevated market trading at high multiples, and uncertainties related to this year’s Presidential election.
With the market’s decline only intensifying today, more stocks are beginning to crack.
Now that the market has fallen substantially, I think we’ve reaped the bulk of the potential profits on our recent purchase of these two ETFs.
Once again, the media has done a splendid job of creating fear and panic among the citizenry.
Wall Street expects this communications equipment company to grow at a 30% annual rate over the next five years.
One portfolio stock had a earnings beat and there are two additional rating changes.
Further upside is expected from this biotech, as a result of ongoing data on the company’s drug’s trials.
This financial firm beat earnings estimates by $0.32 last quarter and is due to report fourth quarter results at the end of this month.
As the market correction continues, it’s important not to focus on the coronavirus news but to focus on the actions of your stocks instead.
Position update: This recommendation’s covered call has seen extreme volatility the past several days.
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 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.