WHAT TO DO NOW: Remain bullish, but be selective on new buys as earnings season revs up. The overall market remains in great shape, with all our market timing indicators solidly bullish. Short-term, a pullback wouldn’t be surprising, but the odds remain in favor of higher prices down the road. We have no new buys in the Model Portfolio tonight, which still has 14% in cash, but we are placing Facebook (FB) and Universal Display (OLED) back on Buy.
Current Market Environment
The Dow boomed 160 points today thanks to a big move in IBM, but most of the rest of the market was quiet, with the Nasdaq rising 1 point and the S&P 500 up 2 points.
From the viewpoint of the overall market, the evidence is still overwhelmingly bullish. All three of our market timing indicators remain solidly bullish, with the market’s intermediate- and longer-term trends pointed up and the broad market in good shape. Moreover, the major indexes are all in gear and hitting all-time highs, while the advance-decline lines are doing the same—all good news.
If there’s one thing to worry about from a market standpoint, it’s that there’s not much to worry about, and we’re starting to see that in some shorter-term sentiment measures. More than 60% of investment advisors are now bullish, for instance, a level that often (not always) coincides with some potholes.
Moreover, individual growth stocks have been more hit and miss than the indexes would suggest, with many marking time and others pulling back in recent days. Indeed, the Nasdaq continues to underperform the Dow Industrials, with the Nasdaq’s RP line approaching multi-month lows today.
With that said, longer-term sentiment measures like money flows show a dearth of excitement, and very few growth stocks are actually breaking down (pullbacks have tended to come after strong runs). That could change during earnings season, but it’s also possible that some strong reports will help new leadership to lift off.
Add it all up, and we remain bullish, though we’re continuing to keep a close eye on our stocks—as always, we’ll aim to jettison our losers and laggards while giving our top performers a chance to continue rising. As for new buying, we’re open to it, but we’re being very choosy right now given the short-term measures mentioned above, and the fact that some stocks we like are set to report earnings within the next week or two.
In the Model Portfolio, then, we have no new buys tonight, but we are placing Facebook (FB) and Universal Display (OLED) back on Buy.
Model Portfolio
Alibaba (BABA 180) looks fine overall, as it’s less than 3% off all-time highs, so we’re staying on Buy. But we are seeing a couple of signs that he stock could be losing steam—BABA hasn’t made any much progress since late August, buying volume on the recent move to new highs was well below average, and, after dipping below its 25-day line just once from January through August, BABA dipped below its 25-day line twice in the past four weeks. Again, nobody is going to argue the sellers are now in control, and we’re not opposed to picking up a few shares here if you don’t own any; BABA is still a top liquid leading growth stock and bounced nicely today. But we’ll be watching to see how the stock handles itself from here. Earnings are due November 2. BUY.
Exact Sciences (EXAS 47) hit resistance a couple of weeks ago (near 50, which is, for whatever reason, a level that often brings in some sellers) and has since pulled back to its 25-day line. It looks like normal action, so you can pick up some shares here if you don’t own any, though like many stocks, it’s probably best to keep new positions on the small side given that earnings are due on Halloween. BUY.
Five Below (FIVE 57) continues to act well, gyrating in the 55 to 57 area during the past couple of weeks. While most of the huge, well-known, mall-based retailers remain in big trouble, FIVE’s growth story has a very long runway, and some macro readings (consumer confidence recently hit a 13-year high according to one respected survey) suggest the retail sector as a whole may be getting off its duff. We’ll stay on Buy. BUY.
While GrubHub (GRUB 52) is still futzing around at the lower end of its trading range, we’re encouraged by its recent action—we’ve now seen announcements by both Amazon and Facebook that they’re getting into the online food ordering and delivery business, at least in part. Yet GRUB really hasn’t gone down on that news as it would have months ago, a small sign that perception may have really changed for the better. All that said, the stock’s intermediate-term future will likely come down to earnings, which are due out October 25—a positive reaction would likely kick off a new advance, but a gap down could have us cutting the loss and moving on. Hold for now. HOLD.
Facebook (FB 176) has definitely improved, running up from its late-September shakeout to new price highs this week. It’s not a perfect picture—the stock’s relative performance (RP) line is still shy of its old peak, and earnings are coming on November 1—but as trend followers, we’re not in the business of arguing against new highs, especially after a good-looking shakeout. We’ll go back to Buy; if you buy, take a small position (maybe half your normal buy, dollar-wise) ahead of earnings. BUY.
PayPal (PYPL 67) got a bit extended last week after a couple more analyst upgrades sent the stock to new highs and a few points above its 25-day line, which the stock has been riding for the past few months. The pullback this week, then, looks normal, but earnings (due tomorrow, October 19) will tell the tale; analysts are looking for earnings of around 44 cents per share and nearly $3.2 billion in revenue, though also important will be total payment volume growth (27% estimate), user growth (six million up from last quarter is the estimate) and take rates (down 11 basis points from last year). We’ll stay on Buy right here, but as always, we’ll be watching the stock’s reaction closely for any signs of abnormal action. BUY.
ProShares Ultra S&P 500 Fund (SSO 100) has been creeping higher along with the S&P 500 during the past two weeks. As we wrote above, the smooth advance lately has led to some investor complacency, which could always produce some sort of short, sharp selloff (maybe down to the 25-day line near 97.5). But the trend is clearly up and the odds favor higher prices down the road. If you own some, sit tight, and if you don’t, you can buy a little here or on dips. BUY.
ServiceNow (NOW 121) looks like a lot of growth stocks—it’s in an overall uptrend, but it’s not powering higher, either, with the stock finding some sellers in the low 120s in recent days. Fundamentally, we continue to think NOW is an emerging blue chip, with tons of recurring income, mushrooming free cash flow, 95%-plus renewal rates and a still-gigantic opportunity ahead of it. That said, like most stocks, its near-term fate is tied to earnings, which are due out October 25. We’ll stay on Buy, but keep new positions small this close to the report. BUY.
Shopify (SHOP 99) has steadied itself in recent days after plunging to a low of 89 last week. We have a small position left and are willing to give it some rope, especially now that the panic selling over the short-selling claims is in the past. Fundamentally, the firm inked a deal with DHL Express, boosting international shipping options for Shopify’s clients. Intermediate-term, the stock is damaged, but we’re still believers in the company’s growth story. We’ll hold onto our small position and see how the stock acts. Earnings are likely due in early November. HOLD.
Universal Display (OLED 138) held support near 125 for a couple of weeks in late September and early this month, and recently has begun to perk up on solid volume. This is the action we were hoping to see after the prior sharp retreat, and it’s enough for us to restore our Buy rating. Of course, earnings are due out soon (November 2), which will probably determine the stock’s fate. Still, big investors are clearly supporting the stock, so we’re OK buying a small (half-sized) position if you’re not yet in. BUY.
Watch List
AbbVie (ABBV 96): It’s not growing at lightning-fast rates, but ABBV looks like a new leader in the biotech field with its core product set to produce 15% to 20% growth for many years.
Autodesk (ADSK 119): We think ADSK can be a solid, steady liquid leader if it decisively gets going on the upside—big investors should be attracted to its steady, predictable subscriber and cash flow gains.
E*Trade (ETFC 44): ETFC remains a solid Bull Market stock, though let’s see how the stock reacts to earnings, which are due out tomorrow.
HubSpot (HUBS 84): HUBS is a leader in inbound marketing for the new digital economy—its software suite is used by more than 34,000 clients, the bottom line is just leaping into the black and the stock recently broke out to new highs. Earnings are due November 1.
