WHAT TO DO NOW: All of our market timing indicators remain bullish, and the major indexes and many stocks are attempting to resume their post-election uptrends. Short-term, we still wouldn’t be shocked by some further wiggles, but we remain optimistic the market’s next big move is up. In the Model Portfolio, we have three changes tonight—we’re selling Callon Petroleum (CPE) but buying Charles Schwab (SCHW) and Netflix (NFLX), leaving us with a little below 10% in cash. Details below.
Current Market Environment
The market had another good day today, with the Dow rising 155.80 points and the Nasdaq advancing 55.38 points.
After a five-plus-week pause, it appears the market is attempting to resume its uptrend, with many major indexes hitting new highs yesterday and today. Moreover, yesterday was the first session in a while in which many stocks that had set up nicely actually charged ahead on good volume.
As for our market timing indicators, there’s been no change—our two trend-following indicators (Cabot Trend Lines and Cabot Tides) are still pointed up and the Two-Second Indicator remains solidly positive, telling us the broad market is in good shape.
Of course, there’s always the chance that this is some sort of fake-out and the recent strength will fade—many short-term sentiment indicators are reflecting complacency, and this week’s move to new highs isn’t the most powerful of all time, with the S&P 500 just a half percent above its December peak and the Dow Industrials booking just one day above the 20,000 level.
Thus, we’re not necessarily betting that the market goes straight up from here; a pullback or shakeout is certainly possible. But the market’s trends are up and the broad market is healthy.
In the Model Portfolio, we have three changes tonight: we’re selling Callon Petroleum (CPE), but we’re adding Charles Schwab (SCHW) and Netflix (NFLX). That will leave us with just under 10% in cash, though with many of the stocks we own and are watching reporting earnings soon, we could have further changes (buy and sell) in the days ahead.
Model Portfolio
Charles Schwab (SCHW 42) isn’t a young pup any more, but it’s one of the best positioned to take advance of a healthy market environment. We wrote about the company in last week’s issue, so we won’t repeat it all here, but suffice it to say that higher asset values, trading levels and interest rates should all boost its bottom line. Fourth-quarter earnings matched expectations and analysts see earnings up 25% this year, which is probably conservative if the bull market persists. SCHW is buyable here, and our loss limit will be in the 37 to 38 area. BUY.
Netflix (NFLX 140) isn’t a brand-new story, but we see a lot of parallels between it and Amazon’s stock a couple of years ago. NFLX topped back in late-2015 and spent more than a year consolidating, even as revenue growth accelerated thanks to rapid international subscriber growth. And now, finally, earnings are kicking in; management said it expects to balance growth and profitability going forward, and analysts see the bottom line doubling this year and next. NFLX is in a solid uptrend here, at all-time price highs (the RP line is at one-year highs and has been pushing ahead since last July) following earnings last week. You can buy some here with a stop in the mid-120s. BUY.
Our patience has run out with Callon Petroleum (CPE 15), as the stock hasn’t been able to get going since its huge share offering a few weeks ago. Shares have popped higher a bit this week so we’re going to take the opportunity to sell into the move and move on to greener pastures. SELL.
Facebook (FB 131) has continued its superb rebound, rallying to within three points of all-time highs. It’s good to see, but so far, the stock’s rally has simply put it back in contention—FB hasn’t made any net progress since early September, and earnings are due out in one week (February 1). Clearly, we’re encouraged, but we’ll stay on Hold until we see how that quarterly report affects the stock. HOLD.
Freeport-McMoRan (FCX 17) reported earnings this morning, and frankly, they were relatively poor—adjusted earnings of 17 cents per share were about half of analyst’s estimates and management’s outlook for copper sales (in terms of pounds) was less than 2016. That (along with continued worries about exports from the firm’s Indonesian mine) caused a good-sized dip today, though it’s important to note that today’s dip comes after a nice run during the prior few days (FCX is still up nicely on the week so far). We’re not going to let FCX melt away if the selling pressures persist, but right now, the stock remains in an uptrend, and we think the bigger picture recovery in copper prices is intact. We’ll stay on Buy. BUY.
Martin Marietta (MLM 242) has come roaring back to life with many infrastructure stocks in recent days, pushing to new all-time highs today. Supposedly the bump is thanks to the introduction of a Congressional infrastructure proposal, but we think the likelier story is that MLM’s tight action represented accumulation in recent weeks, as big investors anticipate a couple of years worth of solid earnings and cash flow growth regardless of the immediate happenings in D.C. Hold on if you own some, and if you don’t, try to buy on dips of a couple of points. Earnings are due out February 14. BUY.
PayPal (PYPL 42) continues to inch up the right side of its three-month base, but the real story will be told after earnings, which will be released tomorrow evening (January 26). Analysts are looking for $2.98 billion in revenue for the fourth quarter and earnings of 42 cents per share, though a lot of emphasis will be placed on the firm’s take-rate (how much it gets per transaction) and the outlook for 2017. HOLD.
ProShares Ultra S&P 500 Fund (SSO 80) has perked up to new highs along with the S&P 500, and we’re staying on Buy. Short-term, we wouldn’t be surprised to see the market retreat, as the major indexes have a habit of head-faking investors near well-followed round numbers (like Dow 20,000). But our main focus is on the intermediate- to longer-term, and until proven otherwise, the evidence tells us the next major move is up. BUY.
Shopify (SHOP 51) is acting well, following-through solidly from its breakout a couple of weeks ago. In fact, it was one of the first growth stocks to legitimately break out (on very good volume), which bodes well. Earnings are due out on February 15, but we’re game buying some here or on dips of a point or two. BUY.
We were close to downgrading XPO Logistics (XPO 47) a few days ago, as the stock had fallen through its 50-day line and was looking sluggish. But the past couple of days have been encouraging, with shares popping higher with the market. We’d really like to see a big-volume up day or two, but so far, so good. We’ll stay on Buy. BUY.
Watch List
Alibaba (BABA 104): BABA is back on the Watch List as it rounds out a new base (which could be part of a gigantic post-IPO structure). The fourth-quarter report was sterling, and the stock reacted positively to the news.
Dave & Buster’s (PLAY 55): PLAY has consolidated normally since early December and is just three points south of all-time highs. We’d like to see the retail sector strengthen, as it’s been lagging.
HealthEquity (HQY 48): HQY is holding its big-volume breakout from two weeks ago nicely. As a leading custodian of health savings accounts, growth should remain rapid for many years and could get a boost from any health reform that passes in Washington, D.C. this year.
Tesla Motors (TSLA 254): The evidence is growing that TSLA’s long Transition Phase is over and investors are looking ahead toward rising sales and the launch of the Model 3. A pullback or consolidation could set up a proper entry point.
Yelp (YELP 43): YELP continues to inch up toward new highs ahead of earnings, which are likely out in two or three weeks.
