Issues
Current Market OutlookThe last week has been brutal, as the sellers have come out of the woodwork and driven most leading stocks down sharply. And this isn’t just a couple of bad days, either—the action since mid June has been spotty, with sharp pullbacks and low-volume, narrow rallies preceding this drop, which has seen a fair amount of abnormal action. The rest of the market isn’t nearly as bad off, and in fact we’ve seen rotation into beaten-down areas like industrials, financials and transports. But our focus is on the leaders, and given the widespread breakdowns, it’s vital to honor your stops and cut back on new buying. If the buyers return soon, we’re not ruling out this being one big shakeout, but the onus is on the bulls at this point, at least when it comes to leading stocks. We’re dropping our Market Monitor back to neutral.
Encouragingly, even amid the recent selling, we saw plenty of positive reactions to earnings and other pieces of news last week, many of which made it into this week’s list. Our Top Pick is Advanced Micro Devices (AMD), which is one of the strongest stocks in the market. Given the environment, start small and buy on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Advanced Micro Devices (AMD) | 82.24 | ||
| Atlassian (TEAM) | 182.16 | ||
| GrubHub (GRUB) | 140.03 | ||
| HCA Healthcare (HCA) | 137.60 | ||
| Hi-Crush Partners LP (HCLP) | 12.18 | ||
| IQVIA Holdings (IQV) | 157.93 | ||
| Robert Half (RHI) | 78.58 | ||
| Stitch Fix (SFIX) | 36.79 | ||
| USANA Health (USNA) | 133.03 | ||
| Yext Inc. (YEXT) | 21.32 |
While the market mourns the misfortunes of poor Mark Zuckerberg, we actually have a little ray of light in emerging markets, as the Cabot Emerging Markets Timer is showing a very new green light. New buy signals are pretty delicate, but we’re taking this one seriously, doing a little new buying and shifting another stock from a Hold to a Buy rating. As the artillery of the trade war rumbles, it’s nice to have something to celebrate. Read on for details.
In today’s letter, I’m adding a consumer staples stock to the Safe Income Tier, positioning the portfolio to take advantage of a possible rebound in the sector. If it doesn’t come to pass, we’ll still be happy to own the stock, a Dividend Aristocrat with near-perfect Dividend Safety and Growth scores.
Elsewhere, I’m selling half of a laggard in the Dividend Growth Tier, and have included earnings expectations for all of our stocks. And at the end of the issue, you’ll find a fresh explanation of a tried-and-true method for boosting your yield.
Elsewhere, I’m selling half of a laggard in the Dividend Growth Tier, and have included earnings expectations for all of our stocks. And at the end of the issue, you’ll find a fresh explanation of a tried-and-true method for boosting your yield.
The overall bull market remains in good shape, with most indexes and stocks trending up. But earnings season, which is now underway, will likely have a big impact—even today we saw lots of distribution among growth stocks ahead of their reports this week and next.
Current Market OutlookThe major indexes didn’t do much last week, as big investors seemed content to wait for the deluge of earnings report in the days ahead to hit the wires. We continue to think the majority of the evidence is positive (trends are up, most leading stocks are in good shape), which is why we’re still bullish; the odds continue to favor higher prices down the road. But, clearly, it’s not 1999 out there—relatively few stocks are hitting new highs and we’ve seen a lack of upside follow-through on the names that did reach virgin turf. Thus, be sure to pick your spots and to have a plan as earnings season ramps up—our guess is that the market’s reaction to the reports of leading stocks will determine whether a new leg up is underway or whether the market has more consolidating to do.
This week’s list is again heavy on growth stocks, though a couple of turnarounds make the list, too. Our Top Pick is one of the first earnings winners of the season—V.F. Corporation (VFC) is a steady-eddy type of company that just lifted from a six-month consolidation after topping estimates.
| Stock Name | Price | ||
|---|---|---|---|
| Green Dot (GDOT) | 85.11 | ||
| Keurig Dr Pepper (KDP) | 25.35 | ||
| Madison Square Garden (MSG) | 298.38 | ||
| Sarepta Therapeutics (SRPT) | 120.93 | ||
| SiteOne Landscape Supply (SITE) | 98.49 | ||
| Square, Inc. (SQ) | 91.04 | ||
| Trex Company (TREX) | 117.56 | ||
| TripAdvisor (TRIP) | 55.14 | ||
| VF Corp. (VFC) | 92.46 | ||
| Zogenix (ZGNX) | 46.50 |
The economy continues to strengthen—rising retail sales, lower jobless claims and steady unemployment. Consequently, it’s no surprise that the broad markets are holding their own. Of course, volatility this year has risen, creating a bit of seesawing in the markets, with the Dow Jones Industrial Average gaining just 1.4% so far in 2018, but sentiment—as you’ll see in our Market Barometer—remains bullish.
The market’s action since its late-June shakeout has been solid, with the major indexes and many leading stocks pushing back toward new high ground. Granted, not everything looks perfect, but the majority of evidence remains positive, including our trend-following indicators, so we remain mostly bullish.
The market’s main trend remains up, with many major indexes hitting new highs in recent days—and many of our stocks doing the same. Those are the stocks you should hang onto tightly—because there’s no telling how far they’ll run.
Updates
[Note: The Cabot Turnaround Letter weekly update won’t be published next Friday, June 19, due to the market being closed for the Juneteenth holiday.]
Before we get into the main topic for today’s newsletter update, a quick note on the portfolio is in order. I’m continuing our “spring cleaning” effort that we began last week by trimming a couple more of our holdings, but I’m also adding a new position to take the place of the recent deletions.
Before we get into the main topic for today’s newsletter update, a quick note on the portfolio is in order. I’m continuing our “spring cleaning” effort that we began last week by trimming a couple more of our holdings, but I’m also adding a new position to take the place of the recent deletions.
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.
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.
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%.
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.
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.
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.
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.
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.
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.
Alerts
An update on one of our stocks, and a rating change on another.
This small semiconductor company beat analysts’ estimates by $0.02 last quarter, and Wall Street is forecasting double-digit growth for the next five years.
One of our stocks reported yesterday after the close and nearly all the analysts following the company are disappointed, including me.
The shares of this food repurposing company are rated 1.6 (Buy) by Wall Street Analysts. The company has strong cash flow and is reducing its debt.
This fitness company has opportunities to expand its mission, but it is in the midst of a turnaround.
An update on one of our stocks, and ratings changes on two others.
This aircraft product maker’s shares are trading at a heavy discount due to an ongoing dispute with Bombardier.
This tele-health company’s shares were recently initiated as ‘Outperform’ at Robert W. Baird, and six analysts have raised their earnings forecasts for the company in the past 30 days.
Today’s bulletin describes a management change at one of our stocks and bullish price movements, especially among integrated oil stocks.
This infrastructure company beat earnings estimates by $0.10 in the latest quarter. Ten analysts have raised their forecasts for both this year and next in the past 30 days.
The top five holdings of this 3-star-rated fund are Credit Suisse Group AG (CSGKF, 4.72% of assets); CNH Industrial NV (CNHI, 4.71%); Lloyds Banking Group PLC (LLDTF.L, 4.68%); Allianz SE (ALIZF.DE, 4.50%) and Bank of America Corporation (BAC, 4.44%).
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.