WHAT TO DO NOW: Continue to lean bullish, but also keep some powder dry as we wait for growth stocks to kick into gear. The overall market remains in great shape, and with the trends pointed up, we expect higher prices down the road. However, growth stocks aren’t participating, with many still under pressure. We put some money to work post-election, but the Model Portfolio has around 30% in cash, which we’ll hold onto until growth stocks kick into gear. Our one change tonight is that we’re placing Proofpoint (PFPT) on Hold.
Current Market Environment
The market finished mixed today, with the Dow rising 2 points as industrial and financial stocks held firm, while the Nasdaq sank 56 points as most growth stocks took hits.
From a top-down perspective, the market continues to look healthy. Our trend-following Cabot Trend Lines (long-term) and Cabot Tides (intermediate-term) remain positive, and we’ve even seen some improved action from our Two-Second Indicator before today’s interest rate-induced expansion.
It’s hard not to be impressed with the action of the major indexes. In fact, looking through hundreds of charts, some of the best charts are of the indexes themselves! As we wrote in last week’s issue, it’s certainly possible that the post-election move has (finally) marked the start of a sustained uptrend after so much sloppy, choppy action during the past two years.
Thus, we expect higher prices ahead for the market in the weeks ahead. Short-term, we have seen some selling on the way up in recent days, so a shakeout wouldn’t surprise us. But until proven otherwise, we expect dips to be buyable.
However, when looking at things from a bottoms-up (individual growth stocks) perspective, it’s clear the market isn’t making it easy on investors. Below the surface, we continue to see a tremendous amount of rotation and exaggerated moves. To this point, most of the strength has been focused in areas of little growth like banks, transports and some industrial-type stocks.
But few growth stocks are participating, with most either trying to build new launching pads after a tough stretch in early November (many big-cap growth stocks fit into this category), or just meandering near their highs, waiting for buyers to arrive.
All in all, we think it’s fine to take a shot at opportunities as they arise. But that last part is key—so far, on the growth side of things, not a ton of opportunities have appeared, though should the market remain strong (as we expect), we expect that to change going forward.
We’re about 70% invested in the Model Portfolio and will stand pat tonight, though we are placing Proofpoint (PFPT) on Hold. Details below.
Model Portfolio
Facebook (FB 119) still isn’t strong enough for a Buy rating, but we’re pleased to see the stock generally hold its recent bounce as it attempts to resume its long-term uptrend. The company continues to expand its offerings; Facebook just integrated some basic games that can now be played within messaging conversations. There remain some worries about possible post-election fallout (issues like net neutrality and trade barriers), but those are likely to moderate. The bottom line is that if earnings really do grow close to 30% next year as analysts forecast, we think FB has another leg up coming. HOLD.
Martin Marietta (MLM 220) has been choppy during the past two weeks, but the action doesn’t appear abnormal—MLM remains well above its 25-day moving average (currently a bit below 210) despite its recent wiggles. Remember, the underlying story here was solid even before hopes of a 2017 infrastructure deal emerged, so while news and rumors of what will come from Washington, D.C. next year will have an impact, a huge legislative lift isn’t necessary for the firm’s cash flow to expand nicely in the quarters ahead. BUY.
PayPal (PYPL 39) has been very quiet on the news front in recent days, and the stock has followed suit, tightening up in the 39 to 41 range during the past couple of weeks. Our patience isn’t limitless here—we have a loss, and the fact that PYPL’s big-volume earnings breakout failed earlier this month isn’t overly encouraging. Still, we do love the story, and when growth stocks kick into gear we think PYPL will attract a good share of institutional money. We advise you to hang on, but a dip back toward 38.5 could have us pulling the rip cord. HOLD.
Proofpoint (PFPT 77) has been disappointing—the stock was one of the first to break out to new highs, and experienced a great upside follow-through on good volume. The sector was acting well and PFPT was basking in the glow of an excellent third-quarter report, too. But a poor reaction to earnings from peer Palo Alto Networks changed the perception of the group, at least in the short-term, as PFPT has given up all its post-breakout gains (albeit on light volume). The chart isn’t broken, and given the overall sloppiness of growth stocks, it’s definitely possible PFPT is just pulling back once more toward support before getting going. Still, it’s prudent to switch our rating to Hold and keep a tight mental stop in place in case the selling pressures continue. HOLD.
ProShares Ultra S&P 500 Fund (SSO 73) looks great, having zoomed to new highs recently along with the S&P 500. As we wrote above, a short-term shakeout of a couple of percent is certainly possible after the recent run, but we tend to think pullbacks will be either brief (a few sharp down days) or shallow (a couple weeks of quiet consolidation). Bottom line, sit tight if you own some, and if not, you can buy some here or on dips of a point or two. BUY.
ServiceNow (NOW 83) has been all over the place like most growth stocks during the past three weeks, with a sharp post-election selloff, then a steady march toward its highs, and this week, another sharp dip. Overall, though, NOW remains within its month-long trading range and above its 50-day line. Plus, some recent cloud software stocks have reported solid results; should the economy pick up steam, there’s no question demand for ServiceNow’s offerings will remain buoyant. You can buy some on this dip if you’re not yet in. BUY.
XPO Logistics (XPO 45) remains in good shape as investors pile into stocks that will directly benefit from a stronger economy. As with Martin Marietta, though, XPO has a great growth story in addition to what could come from Washington, D.C., as ace stemwinder Bradley Jacobs boosts efficiencies after XPO’s numerous acquisitions in recent years, leading to surging cash flow and earnings. BUY.
Watch List
Celgene (CELG 119): CELG boomed in the days after the election but has now settled into a range in the low 120s. We like the story and steady growth outlook, though we would like to see the stock follow through on the upside from here.
Inphi (IPHI 45): Inphi has been tightening up just above its prior highs. This little-known chip stock calls itself the leading component and platform supplier for the booming optical networking industry.
Parsley Energy (PE 38): After a long wait, PE might finally be getting going—the stock had a huge shakeout this week, and today, a big-volume lift to new highs after OPEC’s production cut. The firm’s acreage in the Permian (and its aggressive drilling plan) is as good as it gets.
Shopify (SHOP 42): SHOP was rejected near new high ground last week, but is still in the middle of its three-month base. Once growth stocks get back in gear, we think SHOP (with its 90%-ish revenue growth and huge opportunity) can do very well.
Veeva Systems (VEEV 46): VEEV gapped to new highs on earnings last week as the firm’s life sciences software platform gains more big customers. Interestingly, growth next year looks good-not-great (less than 20%), but the story and chart look great.
Zillow (Z 36): Like most growth stocks, Z is meandering just south of key resistance—decent action, but we’d like to see a decisive show of strength to tell us the stock’s long-term uptrend is resuming.
