WHAT TO DO NOW: The market could be a bit vulnerable in the short-term, especially as the indexes haven’t made any progress in about a month. But our market timing indicators remain bullish, telling us to expect higher prices over time. In the Model Portfolio, we’re placing Callon Petroleum (CPE) on Hold tonight, but we’re adding Shopify (SHOP). That will leave us with about 20% in cash.
Current Market Environment
The market rallied further today, with the Dow gaining 99 points and the Nasdaq advancing 12 points.
While there’s been plenty of movement and volatility so far this year, our market timing indicators remain solidly bullish, and we remain impressed with how little giveback there’s been following the big post-election run. As for individual stocks, we’re seeing mostly normal consolidations among cyclical stock and we’re spotting more growth stocks that are either setting up well or have moved out to new highs on solid volume.
That said, there are a couple of things to keep an eye on. The first is the indexes themselves—most have now moved sideways for the past month following a strong five-week rally. It would be nice to see the indexes resume their advance, essentially saying their month-long pause is over.
The second thing to watch is the rotation we’ve seen since the start of the year. Money has generally moved into some lagging growth stocks, which is good to see from our point of view. But that’s also had the effect of thinning the market advance.
Back on December 8, for instance, more than 500 stocks hit new highs on the Nasdaq. Then, on December 20, when the Nasdaq approached new high ground, that figure was around 250. And now, as the index has pushed to all-time highs in recent days, the figure has been around 100. There’s been a similar pattern with other indexes, too.
Such thinning action isn’t a death knell for the market; if anything, the rotation could prove healthy for the longer-term advance. But there’s no question fewer stocks are taking off at the moment.
Short-term, it’s a coin flip as to which direction the market takes, but when looking at the intermediate- and longer-term (which is where our focus is), the weight of the evidence remains positive, so the odds favor an eventual resumption of the advance.
In the Model Portfolio, we’re making a couple of moves—first, we’re placing Callon Petroleum (CPE) on Hold, but we’re also adding Shopify (SHOP), leaving us with around 20% in cash. Details below.
Model Portfolio
Callon Petroleum (CPE 15) tested support near 15 today and bounced nicely on the back of higher oil prices, all of which was good to see. That said, there’s no question CPE has been a laggard lately, probably due to the huge share offering four weeks ago. Because of that, we’re going to place the stock on Hold tonight and use a mental stop right around 15—it would be great if CPE advances from here, but if it doesn’t, we’ll sell and look for greener pastures. HOLD.
A few days ago, Facebook (FB 126) was testing support and looked ready to break down. Now it’s come back to life! The rotation in some lagging growth stocks has helped, as has a good amount of positive analyst commentary and some news on expanding Instagram advertising. That said, the recent rally has brought shares back to the middle of their recent range—certainly encouraging, but FB remains in a sideways pattern. We’ll stay on Hold, though with earnings due out February 1, we’ll be looking for a decisive move in the weeks ahead. HOLD.
Freeport-McMoRan (FCX 16) is another stock that’s done well since the calendar flipped, helped by the perception that copper demand (and prices) will remain buoyant for at least the next couple of quarters thanks to recently-announced Chinese cutbacks, rising industrial demand and mine supply cuts during the prior bust. Freeport will report earnings on January 25 (two weeks from today), though most of the focus will be on the future and how well FCX will be able to monetize higher copper prices. There’s some resistance near 16, but we think the stock’s tedious correction is over. BUY.
Martin Marietta (MLM 222) is a tough call right now. On the one hand, the stock hasn’t done squat since we recommended it; on the other hand, shares have etched a tight base and are near their 50-day line. Given that the market has been treading water for a month, too, we’re going to stick with a Buy rating, but if you buy here, use a tight stop—a dip below 215 or so would likely have us moving on. BUY.
PayPal (PYPL 41) is holding its recent move that pushed it above its 50-day line for the first time since November. It’s a good first step, but we’ll need to see more for a Buy rating. Earnings are due out on January 26. HOLD.
ProShares Ultra S&P 500 Fund (SSO 79) has paused between 76 and 79 during the past month, catching its breath following the big November/early December run-up. As we wrote above, in the short-term, the market is more of a coin flip, but the odds continue to favor higher prices in this bull market. You can buy some SSO around here. BUY.
Shopify (SHOP 48) is a new addition tonight. The company’s cloud-based platform helps small and mid-sized businesses sell online (including through a website, on social networks or via email-related sales), as well as providing access to payment solutions, analytics, short-term lending and plenty of back-office solutions like inventory and order management. It’s a huge market—Shopify had 325,000 customers at the end of September—and the firm collects money from subscriptions (ranging from $30 a month to $300 per month) and by taking a cut of transactions that occur over its platform. Earnings have been stuck just south of breakeven as Shopify invests in its business, but revenue growth (89% in the third quarter) has been outstanding. The stock surged to new highs on huge volume last week and has held those gains, so it appears likely SHOP is resuming its longer-term uptrend. We’ll add it to the Model Portfolio tonight and use an initial loss limit in the 42 to 43 area, about 10% to 12% down from here. BUY.
XPO Logistics (XPO 44) is a lot like MLM—we have a small loss and the stock has been pulling back and consolidating since early December … but it’s quieted down and found support near its 50-day line. Frankly, if you don’t own any, we think this is a good entry point, though a tight stop in the 41 area is prudent. Business-wise, the firm just announced a supply chain contract with big engine maker Cummins. BUY.
Watch List
AK Steel (AKS 11): We continue to think steel stocks could have solid runs as prices for steel accelerate higher and the stocks trade tightly after big runs. Steel Dynamics (STLD 37) is another to watch.
Arista Networks (ANET 99): ANET remains in a two-steps-forward, one-step-back advance. So-so earnings estimates are a concern, but the stock tells us big investors believe demand for its data center switches will remain strong.
Charles Schwab (SCHW 41): Schwab is a huge company, but it’s posted excellent growth in recent quarters (25%+ earnings growth, accelerating sales growth), and it should benefit in a big way from both higher interest rates and a healthier stock market. It’s a leading Bull Market stock. Earnings are likely out next week.
Dave & Buster’s (PLAY 56): PLAY is still well positioned, though it has been tossed around a bit this month. Worth watching.
HealthEquity (HQY 47): It’s thinner than we’d prefer, and the valuation is elevated, but HQY has a huge runway of growth as health savings accounts (HSAs) become more popular. Shares have taken off on big volume this week.
Netflix (NFLX 131): NFLX has earnings on January 18. Shares have nosed out to new highs, but the reaction to the report will likely determine the stock’s next major move.
Yelp (YELP 41): Competition fears have proven false, as Yelp’s revenue and cash flow growth remain strong as it grabs share in the local online advertising industry. The stock is a couple of points south of all-time highs. Earnings are likely due in early February.
