WHAT TO DO NOW: Remain bullish. The market is healthy and most stocks are acting well despite the rotation in and out of sectors. The intermediate- and longer-term trends are pointed up. We are doing a good bit of buying, increasing our position in ProShares Ultra S&P 500 Fund (SSO), buying the second half of our position in Exact Sciences (EXAS) and adding a full (10%) position in Five Below (FIVE). In response to Today’s big dip in Shopify (SHOP), we are selling half of our position and holding the rest. Details below.
Current Market Environment
With no major economic data releases or worrisome headlines, markets had a quiet day today, closing narrowly up as all three of the major indexes settled down after a five-day rally. At the close, the Dow was up 15 points and the Nasdaq rose a scant 3 points.
The general market picture continues to look bright. All three of our key market timing indicators remain bullish—both the market’s intermediate- and longer-term trends are pointed up, and the broad market is in great shape, with the Two-Second Indicator continuing to record fewer than 20 new lows day after day.
Looking out a bit, we read one very interesting study recently from Ryan Detrick of LPL Financial. This year was only the seventh time since 1928 that the S&P 500 rose each month from April through September. In the prior six instances, the fourth quarter (October-December) was positive every time, sporting an average gain of nearly 10%.
With that said, we have seen a few short-term yellow flags, such as the huge number of stocks hitting new highs recently (nearly 650 on the NYSE and Nasdaq combined yesterday!) and a string of low put-call ratios. Add the fact that earnings season will soon get underway, and we wouldn’t be surprised at all to see the market pull back some.
As for individual stocks, we are still seeing some growth stocks struggle, or at least not lead the way higher as they have all year. That’s not bearish for the overall market (in fact, the broadening is likely a good thing), but the situation involving growth stocks needs watching.
Overall, though, we’re increasingly optimistic given the evidence, so we’re doing some new buying tonight.
As for the Model Portfolio, because we’ve taken some good-sized partial profits of late (certainly not a bad thing), we currently have just 1.5 open slots, but a cash position of 27%. In other words, any new position added here, according to our “normal” formula, would be monster-sized!
Thus, we’re going to bend the rules as we make a few moves tonight. First, we’re going to buy more of ProShares Ultra S&P 500 Fund (SSO); we had taken partial profits earlier this year, but with the bull market broadening out and the aforementioned study regarding the fourth quarter, we think putting more money to work here will pay off.
Second, we’re buying the second half of Exact Sciences (EXAS), which has accelerated higher on great volume.
Third, we’re going to take a 10% position (10% of our total portfolio value) in Five Below (FIVE), which we believe is getting going after a very long rest period.
And fourth, we’re going to sell half of our position in Shopify (SHOP), which came under selling pressure today due to a short-seller’s report.
These moves will leave us with around 14% in cash. Details below.
Model Portfolio
We’ll start with Five Below (FIVE 55), our new addition, though we really don’t have much to add to our brief write-up in last week’s issue. The company’s steady fundamental growth story is both proven (with nearly 600 stores already in operation and years of sales and earnings growth in the books) and enticing, as it’s likely that the firm will boost its store count by 15%-plus annually for many years to come. A dip all the way back to the high 40s would tell us that the recent move wasn’t a “real” breakout, but right here, the story, numbers and chart are all aligned on the upside. As mentioned above, we’re buying a 10% position in the stock; if you have a $50,000 account, for instance, buy $5000. BUY.
Alibaba (BABA 179) bounced off its 50-day line after last Monday’s big decline (we took half our shares off the table), the second successful test of that support area during the past two months. That’s obviously a good thing, and the stock has since rallied to within a couple of points of all-time highs. It’s not a perfect rally—volume has been light on the rebound, and the stock hasn’t made any net progress for about six weeks—so some further consolidation could be in order. But the major trend looks great, and we can’t ignore the recent rebound. Hold on if you own some, and if you don’t, you can buy a small position around here. BUY.
Exact Sciences (EXAS 48) briefly spiked above 50 yesterday after one analyst bumped his price target, partly because he sees increasing re-order rates among physicians for Cologuard (which was one of the key points of contention by a short-selling outfit earlier this year). BUY THE SECOND HALF.
Facebook (FB 168) had a good-sized shakeout last Monday and a multi-day recovery since, but net-net, the stock hasn’t gone anywhere since late July. That’s not a horrible sign, and in fact, the immediate snapback last week is definitely a positive. But given the lack of movement, we think Hold remains the appropriate rating. HOLD.
GrubHub (GRUB 54) fell sharply on September 22 on news that Amazon was getting more heavily into the food delivery space, but so far, that marked the bottom of the stock’s pullback, and it’s since rallied back somewhat. If GRUB can really shake off that Amazon news it would be a great sign that competition-related news isn’t having the same effect it used to. That said, we’ll let the stock tell the story—so far, the stock is handling itself fine. HOLD.
Like most everything else, PayPal (PYPL 64) has also had some wobbles during the past couple of weeks, but so far, the stock remains entrenched within a well-defined uptrend. At some point, the stock will have a “real” correction, but we continue to think PYPL is a liquid leader that’s relatively early in its overall uptrend. The next big event will likely be earnings, which are due October 19. BUY.
ProShares Ultra S&P 500 Fund (SSO 98) has leapt to new highs along with the S&P 500 in recent days, as it takes aim at the century mark. We’re stock pickers at heart, but owning a leveraged long fund of a major market index is a great play in a bull market, and it’s also one way to play the recent broadening/rotation we’ve seen in the market. Tonight, we’re going to boost our position a bit, buying 20% more shares to our total. In other words, if you own 100 shares, buy another 20. BUY.
ServiceNow (NOW 118) has bounced back impressively from last Monday as it knocks on the door of new-high ground. In fact, we see the recent dip as a good-looking shakeout after its breakout in late August; a leap above 119 or 120 would be highly bullish. Earnings are due on October 25. If you don’t own any, you can go ahead and buy some around here. BUY.
Shopify (SHOP 103) has been hit by a report from Citron, the short-selling specialists, alleging that many of the company’s customers for its Website software aren’t going to make money and shouldn’t be going online at all. We don’t have an opinion about the validity of the charges, but the stock’s dip from yesterday’s close at 117 to today’s low at 101 (about 12%) certainly requires attention. We recommend selling half of your position in the stock and holding the rest. The market will sort out its opinion about the seriousness of the charges in the next day or two, and it may be that there will be an opportunity here. But we think it’s a good idea to reduce risk a bit until the market makes its decision. SELL HALF, HOLD THE REST.
Unlike most of our holdings, Universal Display (OLED 128) hasn’t bounced all that much following its waterfall-like four-day decline from 145 to 125. OLED hasn’t broken any key support, and of course its fundamental story remains huge, but our antennae are up. We sold half our shares last Tuesday, and if the stock shows much weakness from here, we could take the rest of our profit and move on. For now, though, we’ll grit our teeth. HOLD.
Watch List
Celgene (CELG 147) has come out of a year-long correction and is riding a wave of buying based on excellent Q2 results and strong 2017 revenue guidance. The company’s Revlimid accounts for 60% of revenue, but the pipeline looks strong and other products are making progress.
E*Trade (ETFC 44) took a nearly seven-week pause from late July through the second week of September, then rallied back to its old resistance at 42 before breaking higher last Friday. The market is healthy and this is a Bull Market stock.
Wynn Resorts (WYNN 147) traded sideways through most of September, but got a boost from good news on September gambling revenues in Macau, which was up 16% year-over-year. The Macau story is big, and Wynn has top quality resort casinos there.
