Current Market Outlook


The month-long rebound that began in early February clearly cracked last week, with the major indexes falling below key support and with some indexes (like the S&P 500 and NYSE Composite) retesting their February closing lows. There are still many stocks holding up well, including most of the growth-oriented names that exploded higher on big volume in February; however, as we saw last week, good stocks can go down in a hurry when the market hits the skids. Overall, we’re shifting our Market Monitor back down to neutral, and the onus is on the bulls to change that—a few strong days could make all the difference, but this downturn may continue until enough investors have thrown in the towel after the market’s huge run last year. We still advise holding strong, profitable stocks, but new buying should be limited and holding a good-sized chunk of cash on the sideline makes sense.

This week’s list still has a lot of good stories and solid charts, and includes a few newer names. Our Top Pick is ServiceNow (NOW), which remains exceptionally resilient. Just remember to keep new buys small given the market.

Stock Name	Price	Buy Range	Loss Limit
Chegg (CHGG)	74.21	21-22	19-19.5
Continental Resources (CLR)	66.19	56.5-58.5	52-54
Floor & Décor (FND)	68.03	49-51	45.5-47
Fortinet Inc. (FTNT)	137.53	51.5-54	47.5-49
HealthEquity, Inc. (HQY)	70.70	61.5-63.5	55.5-56.5
Netflix, Inc. (NFLX)	423.92	307-322	280-285
PagSeguro Digital (PAGS)	35.09	35-37	31-33
Penumbra Inc. (PEN)	173.25	116-120	106-108
Red Hat (RHT)	0.00	146-153	135-139
ServiceNow (NOW)	341.86	167-172	155-158

The possibility of a trade war between the U.S. and China has dealt a blow to many Chinese stocks. Most of the damage is being done by withdrawals from China exchange-traded funds and broader emerging-market or ex-U.S. funds. But whatever the source, the reality is that we have a new warning signal from the Cabot Emerging Markets Timer.

Volatility is the theme in the 2018 markets. And while the markets have bounced about since our last issue, at least the momentum has been upward, with the Dow Jones Industrial Average gaining almost 600 points.

The economy continues to grow at a healthy pace, with job openings increasing, unemployment steady and consumer sentiment rising.

Market sentiment, as you’ll see in our Advisor Sentiment Barometer and our Market Views remains bullish, although some of our contributors are expressing caution in the long run.

Current Market Outlook


The market had a brutal day today, with the major indexes (especially the Nasdaq, which had been the strongest index) plunging on big volume. (The reason, Facebook’s naughtiness, doesn’t matter much to us.) Today’s dramatic move calls into question the market’s recent rally—most indexes we track are still hovering above key support, but net-net, there hasn’t been any progress for the past eight to 10 weeks, which isn’t ideal. As for leading growth stocks, they did get hit today, though most remain in good shape on their charts. All in all, we’re still in favor of holding your strong, profitable stocks and giving them a chance to consolidate. But with the market evidently still not out of the woods, it’s best to go slow on the buy side and make sure you honor your stops and loss limits while we watch to see how the market reacts to this selling wave.

This week’s list is more full of what we’d term secondary leaders—still great potential, but not the liquid leaders we’ve seen pop up in recent weeks. One exception: Nutanix (NTNX), which looks like an emerging blue chip of sorts, is our Top Pick—pullbacks would be very tempting after its super-powerful breakout.

Stock Name	Price	Buy Range	Loss Limit
AAXN (AAXN)	87.11	36-38	32.5-34
Baozun (BZUN)	44.24	45.5-48.5	41.5-43.5
HCA Healthcare (HCA)	137.60	100-104	94-96
Insulet (PODD)	175.69	82-84.5	75-77
Loxo Oncology (LOXO)	186.59	115-120	104-107
MKS Instruments (MKSI)	109.43	117.5-122.5	107-110
Nutanix (NTNX)	55.91	49-52	44-46
Pegasystems (PEGA)	0.00	59-61	55-56
PTC Therapeutics (PTCT)	0.00	27.5-29.5	25-26.5
Vipshop Holdings (VIPS)	14.25	17-18.5	15-16

The charts and the fundamentals of leading growth are likely pointing toward a new sustained advance. With 22% cash, we’re building our Watch List and looking to put more money to work, ideally on dips or shakeouts.

The markets have been bouncing around lately, but as our contributors note in our Market Views section, “volatility can be your friend.” The dips can provide some great opportunities to pick up temporarily undervalued companies. And with the economy continuing to perform well, all signals for a longer bull run say go.

The market is strong, and the strongest sector of all is growth stocks; we have bunch hitting new highs. As to today’s recommendation, it’s a repeat, a stock we owned successfully last year and that looks good to enter again.

Has there ever been anything as overvalued as SpaceX (SPCX)?

Elon Musk’s rocket and space-based internet company reported $18.7 billion in revenue in 2025. That’s less than half the revenue declining electronics store chain Best Buy (BBY, $41.7 billion) generated last year, less than International Paper Company (IP, $23.6 billion), and barely more than Casey’s General Stores (CASY, $17.6 billion). Those three companies have a combined market cap of roughly $67 billion. As of this writing, SpaceX has a market cap of $2.7 trillion. That’s more than the combined market cap of Walmart (WMT), JPMorgan (JPM) and Visa (V). Together, those three companies generated $847 billion in revenue last year.

Small caps continue to hold up well. The S&P 600 Small Cap Index is up modestly since last Thursday and is trading just below the fresh all-time highs it hit earlier this week. The group’s resilience stands out, especially against a backdrop of narrowing leadership and ongoing rotation beneath the market’s surface.

The main macro development this week was the Fed’s June meeting and Chair Kevin Warsh’s press conference, which confirmed a shift in policy direction.

WHAT TO DO NOW: The market’s bounce has been a good one, and the intermediate-term outlook remains bright. That said, near term, there are still some crosscurrents (rotation into the broad market, Dow outperforming the Nasdaq) that tell us growth stocks could throw us another curveball in the coming week or two. Overall, then, we’re mostly standing pat, but we’re going to add a half-sized stake in Guardant Health (GH) here, leaving us with a still-good-sized cash position of 37% or so. Details below.

Stocks started this week with a huge rally as the Iran ceasefire deal appears to be the real thing.

Of course, it’s been months of supposed peace deals falling apart. It’s hard to believe. I’m sure that fact is holding the market back somewhat. But this one is different for a couple of reasons.

Stocks are starting off this week with a huge rally as the U.S. and Iran have reached a ceasefire deal.

We’ve been here before. These peace deals have fallen apart several times. I’m sure that fact is holding the market back somewhat. But this one is different for a couple of reasons. First, it’s the furthest a peace deal has gotten with both sides agreeing and independent verification from Pakistan. Second, this is what a peace deal would look like at this point if it’s real and lasting.

[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.

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.

We’re enjoying better-than-expected results from reporting companies this week. Here’s my quick take on three Cabot Small-Cap Confidential positions that have recently reported.

For 2017, 12 analysts have increased their earnings estimates for this home builder, and the stock was recently upgraded by FBR & Co. to ‘Outperform’ and by BofA/Merrill, to ‘Buy’.

GameStop (GME) is about 5% lower today after Target (TGT) reported earnings that missed estimates and issued disappointing guidance. Other store-based retailers are also pulling back today. Analysts fear that Target stores’ lower traffic and comp sales are a bellwether for other brick-and-mortar retailers.

This telecom company beat analysts’ estimates by $0.12 last quarter, and Wall Street is forecasting triple-digit growth for the company this year.

This Internet of Things company beat estimates by $0.11 last quarter. Analysts expect double-digit growth this year and next, with 11 increasing their 2017 estimates in the past 30 days.

Synchronoss Technologies (SNCR) is the subject of an investigative report published today by the Southern Investigative Reporting Foundation.

12 analysts have increased their 2017 earnings forecasts and seven have raised their 2018 estimates for this telecom company in the past 30 days.

Stockbrokers.com just ranked this brokerage company #1. The shares were recently upgraded to ‘Outperform’ at Credit Suisse and Nomura.

I’m maintaining my rating of Hold Half for the time being. I’ll keep a close eye on the stock and will update you again in Friday’s Weekly Update.

Updates on 10 of our stocks and more.

Bank of America analysts just upgraded the shares of this tech company to ‘Buy’. The company beat analysts’ estimates by four cents last quarter.

The retail sector has been tight all last year, and it doesn’t look like things will be improving anytime soon.

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.