Issues
Do you feel like you’ve been on a roller-coaster lately? Well, you’ll probably need to hold on tighter to your seats this year, as it looks like market volatility is here to stay. After several multi-hundred point swings in the past month, and surging past the 26,000 mark, the Dow Jones Industrial Average’s net loss since our last newsletter was some 745 points. And while the overall market sentiment remains bullish, the bears have gained some steam—for longer-term prognostications.
After a two-week correction that prompted us to axe some stocks from the portfolio and reduce our exposure to others, markets have staged an abrupt about-face and staged a four-day rally. It’s not enough to turn our shorter-term indicators positive, but it’s a welcome relief. If the rally continues—which would be unusual given the history of similar corrections—we will change our tactics accordingly.
Today’s bargain is a little-known stock in the fast-growing industry of marijuana farming, production and distribution, which recently was selling at a discount of more than 50% from its recent high. It’s rebounded a bit since then, but is trading calmly, and I think this is a decent entry point.
Current Market OutlookAfter a 10-day, 11% plunge for the major indexes, the market has stabilized for the time being. When looking at the evidence, we see that the longer-term trend is still up, but there’s no doubt the intermediate-term trend is down, the broad market is unhealthy and many stocks have cracked. A bounce could easily get underway at any time, but until the intermediate-term trend turns up (indexes back above their 50-day lines and some stocks acting better), you should play some defense by holding cash, cutting back on new buying and, if you own some broken stocks, using any market rebound to pare back. On the flip side, we still advise holding your resilient stocks—if they’ve held up so far, they have a good chance of doing well whenever the correction finishes up.
What’s interesting is that, despite the market carnage, we saw a ton of positive earnings surprises last week—which is a good way to spot potential leaders down the road. Our Top Pick is Grubhub (GRUB), which has the look of an emerging blue chip.
| Stock Name | Price | ||
|---|---|---|---|
| Array Biopharma (ARRY) | 46.35 | ||
| BeiGene (BGNE) | 170.20 | ||
| Century Aluminum Co. (CENX) | 17.24 | ||
| Fortinet Inc. (FTNT) | 137.53 | ||
| GrubHub (GRUB) | 140.03 | ||
| New Relic (NEWR) | 103.70 | ||
| Snap Inc. (SNAP) | 16.68 | ||
| Twitter (TWTR) | 40.37 | ||
| W.W. Grainger, Inc. (GWW) | 311.99 | ||
| Wayfair (W) | 167.03 |
In the last two weeks we’ve seen unusual volatility in the stock market coupled with rising interest rates. However, the fundamentals remain strong and our long-term view is positive.
Emerging market stocks corrected sharply along with U.S. stocks today, dropping back to December levels and closing decisively below the MSCI EM ETF’s 25- and 50-day moving averages. We didn’t really need that kind of technical signal to tell us that all growth stocks were falling off the end of the dock, but it’s good to get a formal notice.
This week’s recommendation is a special situation—a transport stock that, thanks mostly to a game changing acquisition, is poised for major earnings growth. And the stock is holding up well after a recent earnings pop.
The market correction finally arrived swiftly in recent days. If you set aside cash with which to buy low, it’s okay to begin deploying some of that cash. In today’s issue we have one new addition to the Buy Low Opportunities Portfolio.
Current Market OutlookAfter a big run last year and a moonshot during January, the sellers have finally come out of the woodwork, pushing the major indexes (and many leading stocks) sharply lower during the past six trading sessions, including a mini-crash today (the Dow was down 1,500 points at one point!). Looking at the evidence, the bull market (longer-term trend) is still intact, but the intermediate-term trend has turned negative and many leading stocks have come unglued. In the near-term, we certainly wouldn’t be shocked to see a snap back, but following a major extreme in price and sentiment two weeks ago and this abnormal selling, stocks probably need some time to wear out the weak hands and digest their recent gains. We’re moving our Market Monitor down to neutral to respect the change in the evidence—we don’t advise selling wholesale here, but you should honor your stops and loss limits, and on the buy side, be very choosy and keep new positions small until the market finds support.
This week’s list is a potpourri of stocks and sectors, most of which have recently reacted well to earnings. Our Top Pick is Pure Storage (PSTG), a fast-growing outfit that emerged from a base on big volume last month.
| Stock Name | Price | ||
|---|---|---|---|
| Autohome (ATHM) | 98.65 | ||
| BofI Holding (BOFI) | 42.93 | ||
| Harris Corp. (HRS) | 198.60 | ||
| Knight-Swift Transportation Holdings Inc. (KNX) | 40.61 | ||
| LPL Financial Holdings (LPLA) | 85.22 | ||
| MercadoLibre, Inc. (MELI) | 980.83 | ||
| Meritor (MTOR) | 21.46 | ||
| MyoKardia (MYOK) | 108.56 | ||
| Pure Storage (PSTG) | 25.64 | ||
| Shutterfly (SFLY) | 94.71 |
Today’s stock candidate is a promising small-cap biotech with two high-potential drug candidates, each of which could develop into a billion-dollar asset.
Updates
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.
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.
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.
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.
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.
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.
Alerts
UPS (UPS) opened 5.5% lower this morning after earnings missed expectations and the company issued disappointing 2017 guidance.
Biogen (BIIB) will spin off its hemophilia division to Biogen shareholders on February 1, 2017. For each share of Biogen, stockholders will receive two shares of the new company, called Bioverativ (BIVV).
Mattel (MAT) fell 17% yesterday after the toy company reported fourth-quarter and full-year earnings that fell short of every analyst estimate.
Sell Amazon.com (AMZN); Applied Materials (AMAT) moves from Buy to Hold; ASML Holding (ASML) moves from Buy to Hold; D.R. Horton (DHI) moves from Buy to Hold; Royal Caribbean (RCL) moves from Buy to Strong Buy; and quarterly and holiday earnings results for Mattel (MAT), Royal Caribbean (RCL), Vertex (VRTX) and Whirlpool (WHR).
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.