WHAT TO DO NOW: Remain mostly bullish, but continue to play things on a stock-by-stock basis. The overall market remains in fine shape, and we’re pleased to see many growth stocks find buyers in recent days (though many still appear to need more time to rest after big runs this year). In the Model Portfolio, we’re buying a 10% position in E*Trade (ETFC), a leading Bull Market stock that’s pulled back a bit after a decisive breakout. That will leave our cash position near 18%.
Current Market Environment
Markets were narrowly mixed today, with the Dow up a healthy 81 points, the Nasdaq up 13 points, and the S&P virtually flat for the day, losing one point.
The overall market remains in good shape, as our trend-following market-timing indicators remain clearly bullish, and the Two-Second Indictor, while not positive, continues to show some (uneven) improvement.
Even when we drill down to individual stocks, most of what we see is positive, with some new leadership beginning to emerge and some of the fresher growth stock leaders (those that broke out just a few weeks ago) looking just fine.
On the other side of the coin, we still think many of the growth stock leaders that got whacked last week look suspect, at least in the short- to intermediate-term. That’s not a bearish thing—in fact, we like the bounces we’ve seen in many of these stocks—but the odds still favor many of them needing time to build new launching pads.
Put it all together and you should remain mostly bullish, but you should also stay flexible. We continue to have mental stops on some of our stocks (some loose, some tight), and have taken a few chips off the table in stocks that had extended runs. But we’re also keeping our eyes open for some new leaders on the buy side.
Tonight, we’re going to buy one new stock—E*Trade (ETFC), a leading Bull Market stock that just got going after a long consolidation this year. The move will leave us with a cash position near 18%. Details below.
Model Portfolio
We’ll start with E*Trade (ETFC 49), which we’ve written about a couple of times during the past few months. There’s no big secret here—business has been good, and the combination of higher interest rates (boosting interest income), higher trading activity (boosting commissions) and corporate tax cuts should all goose earnings in the months ahead. Of course, ETFC isn’t a go-go stock, so we’re not expecting the stock to double in a month, but we like the trend, and think today’s pullback (after the Fed’s move) provides a solid entry. We’ll buy a 10% position (putting 10% of the portfolio’s value in the stock). BUY.
Alibaba (BABA 176) continues to take some small, intriguing stakes in a variety of high-potential companies; last week, it plopped $200 million into an online Indian supermarket startup. It also inked a vague deal with Ford to work together in some form or fashion on the retail front. The stock fell from 192 to a low of 164 during the Nasdaq’s selloff, and bounced back to 180 before backing off. Long-term, it looks fine, but we need to see more strength (and possibly some quiet trading) before going back to Buy. HOLD.
Exact Sciences (EXAS 52) is close to the edge for us, as the stock has continued to slide in recent days. Ideally, yesterday’s action—the stock fell to near 48 before finding support, about 20% from its highs—will mark something of a washout low for EXAS to build off. Fundamentally, nothing has changed, so we want to give shares every chance to hold up. That said, we also don’t want to let a good trade go awry; we took partial profits last week and have a rough mental stop near our cost basis (in the 48 area). HOLD.
Five Below (FIVE 67) continues to act well, hovering near its highs. Short-term, there’s no question the stock is extended to the upside (the 25-day line is around 61.5), but longer-term, the fact that FIVE has stretched into the upper 60s (well above the highs of its four-year base, near 55) tells us the major trend has turned decisively up. Hold on if you own some, and if you don’t, try to get in on dips of a couple of points. BUY.
Facebook (FB 178) has bounced back impressively during the past week, recouping around three quarters of its decline. Like many growth stocks, it doesn’t look ready to run quite yet, but after a long rest period (no progress from late-July through early December), FB is back above its 50-day line and isn’t far from all-time highs. A bit more strength could have us going back to Buy, but right now, Hold is the appropriate rating. HOLD.
Grubhub (GRUB 71) remains under strong accumulation, and we continue to think the stock has recently begun a sustained advance. The stock got a boost earlier this week after an analyst said Amazon’s competitive impact has lessened, and that Grubhub might make some more acquisitions. Then today, the company announced an expanded deal with Cheesecake Factory; it’s now offering delivery services for the restaurant chain in 18 states. With the stock now at new highs, you can buy some here or (preferably) on a retreat of a couple of points. BUY.
PayPal’s (PYPL 74) rebound has been solid, though not spectacular, getting back more than half of its decline, though the bounce came on very low volume. One analyst opined today that the firm’s deal with Synchrony (in which PYPL will sell nearly $7 billion of its loans and receivables, freeing up cash to invest elsewhere) will prove even more beneficial than initially thought. Over time, we think PayPal’s growth story has a long way to run, but like many growth stocks that have enjoyed big runs, shares look like they need some time to rest. HOLD.
It’s not a stock you’ll brag about at a cocktail party, but ProShares Ultra S&P 500 Fund (SSO 108) has proven to be an easy, low-stress investment in recent months. SSO tagged new high ground today! That said, the fund is clearly extended to the upside (the 25-day line is around 104.5), so look for pullbacks to start a new position. BUY.
Shopify (SHOP 103) held key support in the low 90s last week and, like most growth stocks, has bounced. There’s no change in our thinking here—fundamentally, we think the growth story remains outstanding. If big investors agree with that assessment, SHOP is likely to hold up near long-term support in the 90 area (give or take). HOLD.
Universal Display (OLED 169) found buyers last week after announcing a new multi-year OLED supply deal with BOE Technology Group, a Chinese display leader. The stock corrected sharply during the growth stock selloff, but held its 50-day line and has recovered somewhat. We’ll stick with a Hold rating, but the chart here looks better than some of our other Hold-rated stocks—some follow-on buying would probably do the trick. HOLD.
Watch List
Energy stocks: Many continue to act well, even though they’re not making headlines. Diamondback (FANG 112), Continental Resources (CLR 47), and ProPetro (PUMP 20) are three of our current favorites.
Nutanix (NTNX 35): We’re very intrigued by NTNX, which is showing excellent technical action, big increases in fund sponsorship and has a big (though hard-to-understand) technology story.
Planet Fitness (PLNT 32): PLNT is a bit thinly traded, but we love the cookie-cutter story here—it’s right up there with Five Below’s in our opinion. A pullback or shakeout should provide a nice entry point.
Splunk (SPLK 80): Considering the sluggishness of technology stocks, SPLK’s action looks good to us, as it’s holding most of its recent earnings move. The longer the stock holds up, the greater the chance it has entered a new uptrend.
