Current Market Outlook


After nine strong up weeks, the past two have seen most of the market hesitate (at first) and then pull back (the S&P 500 fell all five days last week), resulting in a few stocks hitting potholes along the way. In the short-term, we think some further consolidation could easily come, shaking out some weak hands. But bigger picture, the recent action looks normal to us—none of the major indexes and very few leading stocks cracked any meaningful intermediate-term support, and today’s sharp rally is a good sign that buyers are still lurking. Be sure to watch your stops and loss limits, and it’s a good idea to be discerning on the buy side, focusing on strong stocks that have pulled back to solid entry points. Market-wise, though, we remain bullish and are keeping our Market Monitor at a level 7.

This week’s list has stocks from all corners of the market, which we see as an encouraging sign. Our Top Pick is RingCentral (RNG), a leader in a new cloud communications field with a stock that’s acting great.

Stock Name	Price	Buy Range	Loss Limit
Carvana (CVNA)	82.90	48-51	41.5-43.5
EPAM Systems (EPAM)	188.24	155-160	142-145
Keysight Technologies, Inc. (KEYS)	97.20	81-85	73.5-75.5
Lending Tree (TREE)	411.51	307-322	278-288
Omnicell (OMCL)	81.03	80-84	73-75
Planet Fitness (PLNT)	0.00	62-64	57-58
Rapid7 (RPD)	63.52	45-47.5	40-41.5
RingCentral (RNG)	238.73	100-105	91-94
Sea Limited (SE)	132.86	22-24	18-19.5
Tandem Diabetes (TNDM)	74.77	61-65	52-55

Emerging markets (EEM) stay in a confirmed uptrend with the support of generally upbeat earnings. Investors have piled about $86 billion into emerging-market stocks and bonds this year, more than in the last nine months of 2018 combined.

We have some earnings updates and a new recommendation that actually delivers the strong e-commerce growth—a leading consumer theme of emerging markets.

The market continues to drive forward, and sentiment remains bullish, as you’ll see in our Market Views. Investors are taking all the D.C. hoopla in stride, and seem content with the favorable economy which continues to provide low unemployment and a strong housing market.

If you own small or regional Western U.S. energy stocks, make sure to read my comments in the introduction about some pending legislation in Colorado that does not bode well for in-state energy production. I’m sorry to say that the legislation is likely to rapidly move through the legislature, because the minority political party does not have enough votes to block it, and the Governor is likely to sign it. For stock investors, forewarned is forearmed.

Some areas of the market have wobbled in recent days, and even the major indexes have stalled out a bit—but none of this looks unusual to me after such a strong 10-week run prior to this. With the trends pointed up and the vast majority of stocks in uptrends, we remain overall bullish, though we’re also keeping a close eye on all our stocks and jettisoning any where the potential has faded (we have two sells tonight).

And in their place, of course, we’re adding higher potential names. Tonight’s Stock of the Week is helping to revolutionize the advertising industry, and the stock has taken a brief rest after a powerful earnings-induced breakout nearly two weeks ago.

Current Market Outlook


For the first time in two months, last week saw some sellers stepping up to the plate, taking profits in leading names despite some good earnings reports. And today we saw very strong selling across the board, with leaders falling sharply across the board, including many that dipped toward support. In the short-term, given the prolonged run off the bottom, more consolidation is likely, so we’re fine taking a profit (or partial profit) here or there. Intermediate-term, though, we’re still optimistic—while some of the action looks iffy, very few (if any) leading stocks or indexes have broken down at this point, and these type of sharp, scary pullbacks (assuming they find support at logical levels) aren’t unusual during bull moves. We’re knocking our Market Monitor down a notch, thinking the near-term will be more challenging, but remain overall bullish.

This week’s list has a bunch of strong names that have recently emerged, so they shouldn’t have as much pent-up selling pressures. Our Top Pick is MercadoLibre (MELI), where business is reaccelerating and the stock just came out of a big consolidation.

Stock Name	Price	Buy Range	Loss Limit
Acacia Communications (ACIA)	51.83	53-56	47.5-49.5
CoStar Group (CSGP)	589.55	450-470	420-430
Cronos Group (CRON)	17.62	20-22	16.5-1705
DocuSign (DOCU)	107.98	52-54	46-47.5
Etsy (ETSY)	112.97	66.5-69.5	60-62
Euronet Worldwide (EEFT)	142.83	130-134	119-122
MercadoLibre, Inc. (MELI)	980.83	445-465	400-415
Novocure (NVCR)	0.00	50-53	45.5-47
Universal Display (OLED)	187.54	143-148	128-131
Zscaler (ZS)	126.22	55-58	49.5-51.5

Already the S&P500’s crisp 20% peak-to-trough drop ending on December 24th seems like a distant memory. Since last quarter, over 90% of all S&P500 stocks have advanced. Being contrarians, this prompted us to look at stocks that haven’t fully participated in the upturn.

In this issue, see the seven stocks whose shares remain well below their two-year highs, yet might have latent recovery potential.

Today’s opportunity is a cloud software stock that’s recovered nicely from its December lows and is moving back up near its 2018 high.
The company is growing quickly, mainly because of an acquisition-led growth strategy. Evidence is building that organic growth is starting to kick in too now that the company has acquired enough solutions to start bundling them into product suites.
This M&A growth strategy is a slightly different one than pursued by the other cloud software vendors in our portfolio. I think it’s compelling. And if I’m right that organic growth will be steadier moving forward, we should see shares perform very well in 2019 and beyond.

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.

Two third-quarter earnings beats and news on two other stocks.

This hardware company topped analysts’ EPS estimates by ten cents in its latest quarter, and seven analysts have raised their earnings forecasts for the company in the past 30 days.

Three ratings changes and one stock looks strong.

The top five investments in this German fund are Bayer AG (BAYZF.DE, 7.97% of assets); Siemens AG (SMAWF.DE, 7.63%); SAP SE (SAPGF.DE, 7.62%); Allianz SE (ALIZF.DE, 7.26%) and Basf SE (BFFAF.DE, 6.92%).

Three of our stocks reported earnings.

This big tech company beat analysts’ estimates by $0.10 last quarter, and Wall Street now expects the stock to rise between $177 and $213.

Quarterly earnings beats from three of our stocks, and an earnings miss from another.

Needham just initiated coverage of this big data company’s shares with a ‘Buy’ rating. The company is expected to grow at more than 42% per year over the next five years.

Alexion Pharmaceuticals (ALXN) receives drug approval, Ameriprise (AMP) and XL Group (XL) report third-quarter results, and ratings changes on two of our stocks.

This consulting firm beat analysts’ estimates by $0.05 in the past quarter and Wall Street is expecting double-digit growth for the company over the next five years.

Five analysts have raised their EPS estimates for this inbound marketing company in the past 30 days. And Zacks has rated it a ‘Strong Buy’, based on EPS growth, in the near- and long-term.

This supplier to the construction industry beat Wall Street’s earnings forecasts by $0.06 per share last quarter. Analysts are expecting 40%+ growth from the company this year.

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.

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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.