Current Market Outlook


The market’s meltdown today cracked the intermediate-term uptrend that got going back in January, with all major indexes (and many leading stocks) closing well below their 50-day lines today. Big picture, we still see this as a bull market, so we’re still OK holding most of your shares in your strong, profitable stocks; encouragingly, despite taking on water, many stocks are still hanging in there. That said, you also shouldn’t be complacent—after four months with no meaningful pullbacks, it’s likely (not for sure, but likely) the market needs more than six trading days to consolidate the January-April advance. In a nutshell, you should keep tight stops in place on losers and laggards, give your profitable names a bit more rope and, on the buy side, be very selective and/or keep positions small. We’re moving our Market Monitor down to a level 5.

Interestingly, this week’s list is very heavy on growth-y names despite the market’s plunge. Our Top Pick is Match.com (MTCH), which has a great long-term story, and the stock has re-emerged after earnings.

Stock Name	Price	Buy Range	Loss Limit
Avalara (AVLR)	102.00	64.5-67.5	56-58
HubSpot (HUBS)	582.89	170-175	157-160
Lithia Motors Inc. (LAD)	146.30	107-111	97-100
Match (MTCH)	0.00	66-69	58-60
PayPal (PYPL)	147.00	105-107.5	98-100
Roku, Inc. (ROKU)	150.46	74.5-77.5	64.5-66
Tandem Diabetes (TNDM)	74.77	60-63	54-55.5
Teradyne (TER)	82.83	44.5-46.5	42-43
TopBuild (BLD)	111.00	77.5-81	70-72
Woodward (WWD)	111.91	105-108	95-97

The smooth uptrend of the past four months has run into a trade war roadblock this week, with the major indexes and many stocks taking hits as tariffs look set to rise. Our Cabot Tides are now on the fence, and while we have no changes tonight, we are holding 20% in cash and have at least one name on a tight leash.
We’ll go with whatever happens from here—should this turn into a short-term shakeout, we’ll hold our stocks and could even do some buying. But should the Tides and/or a stock or two crack, we’ll do some work on the sell side.

The markets were doing just fine until Trump decided to stir up the Chinese tariff pot again. Employment continues to be healthy; the housing market remains strong and consumer and advisor sentiment is bullish. We’ll just have to see how this plays out, but I imagine it will be a flash-in-the-pan situation, lots of talk and probably little action.

Meanwhile, our contributors are long-term bullish and short-term cautious, as you’ll see in our Market Views section.

The stock market isn’t done rising. Nevertheless, it’s certainly okay to begin accumulating cash with which to buy low during the next stock market correction. The way I personally handle that is when I sell a stock, I put half of the proceeds into my brokerage account’s money market fund, and I buy shares of stock with the other half. In that manner, I get to participate in the market’s bull run while also “saving for a rainy day”. The best antidote to a stock market correction is having money available to buy low!

The market remains in good health, and all Cabot’s market timing indicators are positive, telling us the odds are that the market will be higher in the months ahead.
For today’s recommendation, I have a well-known dividend-paying mega-cap that has a very good chance of providing good capital gains in the months ahead, thanks to a landmark deal with Apple.
As for the current portfolio, overall, our holdings are performing quite well, with many hitting new highs in recent weeks. The portfolio is now full, but I have no sell recommendations. Details in the issue.

Current Market Outlook


Out-of-the-blue tariff threats emerged over the weekend, which roiled markets overnight and led to the usual spate of predictions as to what comes next in the U.S.-China trade saga. But when things get volatile, it’s even more important to simply stick with the facts and not get caught up in the guesses of what may come. Today, while the major indexes were down, they held well above support, which keeps the intermediate-term trend pointed up. And leading stocks fared even better, with many actually finishing up after horrid opens. Of course, it’s always possible that this is the start of a more meaningful pullback/correction, and if the uptrend is cracked, we’ll take a more cautious stance. But so far, the facts remain bullish, so you should remain heavily invested.

This week’s list is relative mixed, with a wide variety of stocks, sectors and growth stories represented. Our Top Pick is Inphi (INPH), a smaller chip and networking firm that looks to be a big beneficiary of the new networking boom.

Stock Name	Price	Buy Range	Loss Limit
Abercrombie & Fitch (ANF)	15.37	28-29.5	25.5-26.5
Coupa Software (COUP)	262.20	102-105	92-94
Enphase Energy (ENPH)	46.70	12.5-13.5	10.2-10.9
Exact Sciences (EXAS)	116.91	101-105	90-93
Harris Corp. (HRS)	198.60	174-179	161-164
Inphi (IPHI)	120.16	48-51	43-45.5
Lattice Semi (LSCC)	23.92	13.5-14.5	12-12.6
LPL Financial Holdings (LPLA)	85.22	80.5-84	73-75
MercadoLibre, Inc. (MELI)	980.83	550-575	475-495
Strategic Education, Inc. (STRA)	182.36	158-164	144-148

We all want to find those rare gems that are disrupting big markets with new solutions.
Today’s company may be one such opportunity. It’s relatively unknown and has a software platform that can address $45 billion in annual enterprise spending right now. That’s a big pond.
It’s a story about big data, digital transformation and business intelligence (BI). These are more than buzzwords. They’re what every company in the digital age needs. And this little guy can give it to them.

While emerging markets stocks have been mostly going sideways, there are always opportunities to find stocks on the upswing or high quality companies that have pulled back but present “catch up” potential.

Our new recommendation is from the latter group and is a name most members will know well.

After two near-record-setting months, stocks are encountering their first real turbulence since March. It’s no surprise.

While stocks go up an average of 10% a year, they rarely do so in a straight line. And after the S&P 500 rallied nearly 20% in April and May and the Nasdaq shot up nearly 30%, a pullback of some kind – or possibly even a true correction – was to be expected. It seems it’s happening all at once.

Stocks look set to enter the summer near all-time highs, but leadership has narrowed, volatility has ticked up, and there’s been renewed scrutiny on the AI trade and valuation concerns in some of the market’s biggest winners.

At the same time, the macro backdrop remains a mix of resilience and intermittent turbulence. While economic data continues to hold up, energy prices remain elevated due to the ongoing Iran conflict – which has no end in sight – keeping upward pressure on inflation and yields.

Tech, commodity, AI, and Explorer stocks struggled this week as concern over capital expenditures increased. Mideast tensions intensified and inflation numbers came in yesterday at their highest rate in over three years, fueled by rising energy costs. The combination of anticipated higher interest rates and rising bond yields impacted the price of precious metals, with gold sliding below $4,200 an ounce and silver falling below $64 an ounce.

Stocks look to enter summer near all-time highs, but leadership has narrowed and volatility has ticked up thanks to renewed scrutiny on the AI trade and open-ended questions about valuations in some of the hottest areas of the market.

There’s also been more focus on the evolving macro landscape, which features a resilient U.S. economy but stubbornly high energy prices due to the ongoing Iran conflict, and somewhat elevated yields. We’re now looking at a higher likelihood of a Fed rate hike, with the odds of a hike by December now well over 50%.

The high-flying AI stocks got crushed on Friday. But those stocks started this week higher. Where do we go from here?

The technology-heavy Nasdaq index fell 4% on Friday, and the S&P 500 fell for the week for the first time in 10 weeks. A couple of things spooked investors. The AI trade turned sour after Broadcom (AVGO) reported earnings that included slightly lower revenue projections for its AI chips than were expected. Also, a blowout jobs report strengthened the case for a Fed rate hike by the end of the year.

A major economic narrative that took shape in recent years was the decline and (presumptive) inevitable death of the so-called “petrodollar,” as a growing number of countries diversified their foreign exchange reserves away from the U.S. dollar and toward gold and alternative currencies like the Chinese yuan.

WHAT TO DO NOW: The overall market remains in good shape, though we are seeing some exuberance on the upside and also a few leaders begin to act sloppy. Near term, then, it’s still a coin flip as to what comes, but the vast majority of intermediate-term evidence remains bullish. In the Model Portfolio, we took partial profits in Marvell (MRVL) earlier this week; tonight, we’re buying a half-sized position (5% of the account) in Bloom Energy (BE), which is extremely volatile but also strong and coming off a few weeks of rest. Our cash position will now be around 28%.

This market just keeps going higher.

Sure, there’s uncertainty out there. The war isn’t over. Inflation and interest rates are still too high. But stocks didn’t get the memo. After a strong April, the S&P 500 rose 5% and the Nasdaq soared 8% in May. The indexes are up 20% and 30%, respectively, since March 30 and are continuing to make new highs this week.

Despite the negative headlines and volatility, stocks just keep going.

After a strong April, the S&P 500 rose 5% and the Nasdaq soared 8% in May. The indexes are up 20% and 30%, respectively, since March 30. It’s also worth noting that despite the ongoing Iran war, the price per barrel of West Texas Intermediate crude oil closed down 17% for the month of May.

This week’s Memorial Day observance marked the traditional onset of the summer vacation season for millions of Americans. It’s a time of traveling, sightseeing, picnics and parties. It’s also the peak season for enjoying cold, carbonated beverages like soda pop and energy drinks.

With this dynamic in play, I think it’s time that we give some attention to our holding in PepsiCo (PEP), which is entering a critical period of its sales year.

On the heels of a miserable March and a euphoric April, I wrote several weeks ago in this space that I thought May would determine which direction the market is truly headed, at least in the intermediate term. We have our answer, and it’s a definitive “up.”

All three major U.S. indexes are touching record highs as of this writing, with the S&P 500 up 4.3% in May, the Nasdaq up 7%, and the slower-moving Dow Jones Industrial inching higher by 1.6%. That’s despite the ongoing Iran war and the accompanying sky-high oil and gas prices, escalating inflation, bond yields at multi-year highs, possible Fed rate hikes later this year, and record-low consumer sentiment.

Stocks have largely shrugged off this week’s dust‑ups in the Middle East as investors continue to bet on a near‑term memorandum of understanding (MOU) that would reopen the Strait of Hormuz and push bigger sticking points between the U.S. and Iran down the road.

Yields have cooled off this week and continue to do so this morning, thanks to a slightly lower‑than‑expected core PCE reading. April core PCE rose 0.2% month over month, below both March’s 0.3% reading and consensus, giving the Fed some breathing room as policymakers weigh the competing forces of inflation and growth.

Here is the second of two Top Picks, both Chinese companies who are growing at double-digit rates.

This homebuilder is enjoying a busy housing market, and beat analysts’ earnings estimates by $0.07 last quarter

Our first idea, a specialty retailer, beat analysts’ EPS estimates by five cents a share last quarter, and 16 analysts have increased their earnings forecasts in the past 30 days.

Our second recommendation is partial profit-taking.

Analysts are expecting this healthcare tech company to grow by 16.53% annually for the next five years.

This health insurer beat Wall Street’s estimates by $0.11 last quarter.

While not yet profitable, this Chinese data center business is growing exponentially.

With recent U.S. anti-dumping investigations against China, particularly for aluminum sheets, as well as China’s clampdown on illegal and polluting facilities that could reduce production, things might be looking up for U.S. aluminum producers.

The top five sectors of this emerging markets fund are: Technology (29.77% of assets); Financial Services (18.52%), Consumer Cyclical (15.94%), Consumer Defensive (9.35%) and Industrials (7.40%).

The top five holdings of this conservative income fund are Tmcc Mstr 1wkl+35 12/06/17 P/P(1.33% of assets); Sumitomo Mitsui Bkg FRN (1.07%); Australia & New Zeala Bkg FRN (1.00%); Bk Amer FRN (0.94%) and Ing Bk Nv 144A FRN (0.93%).

There was significant share price action in two of out stocks today.

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.