Issues
Current Market OutlookThe strength that began around July 4 continued last week as big investors returned to their desks, pushing most major indexes to marginal new recovery highs. There’s still plenty of news-driven action (volume was light even through last week), and earnings season, which is beginning to get underway in earnest, is sure to have an impact. But the intermediate-term trend (which was iffy in late June) has rejoined the longer-term trend on the upside, and many leading stocks have either snapped back to new highs or are building sound launching pads. We’re always on the lookout for renewed selling pressure, but the evidence has improved, so we’re moving our Market Monitor back to a level 8.
This week’s list is again heavy on growth stocks, though there are a couple of special situations presented as well. Our Top Pick is ZTO Express (ZTO), a young, volatile Chinese stocks with huge growth and a very strong chart. Start small, ideally on dips.
| Stock Name | Price | ||
|---|---|---|---|
| Energen (EGN) | 77.04 | ||
| Etsy (ETSY) | 112.97 | ||
| GDS Holdings Limited (GDS) | 80.15 | ||
| Grand Canyon Education (LOPE) | 121.03 | ||
| Madrigal Pharmaceuticals (MDGL) | 234.07 | ||
| Palo Alto Networks (PANW) | 236.92 | ||
| Roku, Inc. (ROKU) | 150.46 | ||
| Sonic Corp. (SONC) | 35.22 | ||
| Workday (WDAY) | 194.88 | ||
| ZTO Express (ZTO) | 28.84 |
The shift from Wednesday’s pullback to today’s nice market bounce is just par for the course as investors scramble to figure out the fallout from alarming headlines and conflicting predictions. It’s not an easy market to navigate, and the portfolio is dealing with it by holding a heavy (50%) cash position and cutting back on most buying. But we’re still finding attractive stocks for our watch list, and will be ready when we finally get a green light from the Cabot Emerging Markets Timer.
The economy remains strong, prompting the Federal Reserve to raise interest rates another 25 basis points, and signaling that two more rate increases are in the cards for the rest of this year. The unemployment rate for June did rise from 3.8% to 4%. But the housing market remains healthy and estimated second quarter earnings growth for the companies in the S&P 500 Index is 20%. If that number is correct, it will be the second best earnings growth that we’ve seen since the third quarter of 2010.
Eternal vigilance is the price of investment success. For us, that means continually adapting our portfolio so that it is best positioned to benefit from the stocks that can do well in today’s market.
Current Market OutlookIt came on low volume and Independence Day made it just four days, but last week’s trading action was encouraging, with the major indexes generally holding key support early in the week and then bouncing nicely into the weekend. By our measures, the intermediate-term trend is still tilted up, and while there are fewer stocks hitting new highs than there were a few weeks back, there remain many stocks in good shape. With the improved evidence, we’re nudging our Market Monitor up a notch to 7; like we just wrote, last week was encouraging. But we also want to see how the indexes and leading stocks handle themselves now that big investors are back at their desks and earnings season gets underway.
This week’s list is again heavy on growth-oriented stocks, including a couple of newer names we haven’t seen before. Our Top Pick is Vertex Pharmaceuticals (VRTX), which has surged toward the top of an 11-month consolidation. We’re OK starting small and adding more if shares advance.
| Stock Name | Price | ||
|---|---|---|---|
| AeroVironment (AVAV) | 80.48 | ||
| Carrizo Oil & Gas (CRZO) | 24.03 | ||
| Dexcom (DXCM) | 421.36 | ||
| iRhythm Technologies (IRTC) | 51.15 | ||
| Lululemon Athletica (LULU) | 304.69 | ||
| Novocure (NVCR) | 0.00 | ||
| Shake Shack (SHAK) | 92.08 | ||
| Twitter (TWTR) | 40.37 | ||
| Vertex Pharmaceuticals (VRTX) | 230.36 | ||
| Yext Inc. (YEXT) | 21.32 |
With this month’s new addition, I decided to go in a different direction then we have with previous recommendations. Instead of featuring another rapid-growth medical device or software stock, I’ve selected a consumer defensive stock in a very specialized industry and with a more modest growth profile. It’s the perfect summertime stock for a period in which many growth stocks are acting a little schizophrenic—especially for those investors who like getting out of the house for a bite to eat and a good beer or glass of wine.
When the market picture gets confusing, as it often does, it pays to have some reliable indicators to depend on—rather than the guy on the evening news. So today, after a couple of weeks of market correction that have done serious damage to some leading stocks and led many pundits to ask whether we’ve seen the market top, we turn to our indicators and ask whether the bull market is truly over, and here’s what they say...
One of the minor predictable patterns that the stock market has developed over the years involves the days before and after holidays (like the Fourth of July). Basically, stocks do a little bit better on those days, but the pattern is neither big enough nor dependable enough to make money on. Still it’s worth keeping in mind as you watch the action of stocks this week.
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
This is just a quick note to let you know that LATAM Airlines Group has changed its trading symbol. The old symbol was LFL. The new one is LTM.
This medical tech company beat analysts’ earnings estimates by $0.22 last quarter. The company is expected to grow at double-digit rates for the next five years.
Here’s a comprehensive analysis of one of our holding’s Q1 earnings and some very interesting commentary from management regarding something I speculated about back in mid-January.
The top five holdings of this fund are Amazon.com Inc (AMZN, 2.96% of assets); Alphabet Inc C (GOOG, 2.31%); Tesla Inc (TSLA, 1.89%); SM Investments Corp (SVTMF, 1.63%) and Roper Technologies Inc (ROP, 1.49%).
One of our stocks reported Q1 results this morning that came in better than expected. Even though the stock ran up 20% in the week leading up to the earnings report, shares blew through their prior all-time high following the report. Shares are trading between 10% and 15% higher at mid-day today, which pegs our current gain at 30% to 35%.
We have non-urgent news and price action today: a few trading ideas, and a possible new CEO.
Taiwan Semiconductor (TSM) reached its Minimum Sell Price of 35.69 today. First-quarter sales and earnings were strong, which sent the stock higher. Now is a good time to take profits.
This company, helmed by legendary investor Warren Buffett, is a conglomerate that owns and invests in dozens of other businesses.
One of our stocks reported results on Thursday and investors didn’t care for the results.
Here are earnings updates on three of our stocks, including a rating change, plus minor updates on three others.
A recent Reuters survey of 24 brokerage companies showed strong support for the shares of this medical products company, with 79% of analysts giving it a ‘Buy’ rating, and 21% rated the shares a ‘hold.’
This global business beat analysts’ estimates by three cents last quarter.
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.