WHAT TO DO NOW: Remain mostly bullish, but continue to pick your spots. The overall market looks great, and our own 7.5% Rule has flashed, portending higher prices in the months ahead. That said, many stocks are extended and/or have earnings coming up soon, so some near-term hesitation isn’t uncalled for. In the Model Portfolio, most of our stocks act well and we’re close to putting some more money to work, but we’ll stand pat for the moment, maintaining our 23% cash position.
Current Market Environment
The major indexes were mixed today, with the Dow finishing up a solid 228 points, but the Nasdaq ended down 6 points and most growth stocks underperformed a bit.
From a shorter-term perspective, we think the market is a bit up in the air right now—most big-cap indexes and a ton of growth stocks have enjoyed solid runs during the past four or five weeks, and with earnings season coming up and with some good news hitting the wires lately (renewed U.S.-China trade talks, Fed hinting at interest rate cuts, etc.), it wouldn’t shock us if we saw some retrenchment in the near term or possibly some rotation out of strong stocks and into some lagging areas.
Because of that, we’re OK holding some cash and advise picking your spots carefully for new buying, especially with those stocks that have earnings coming up in the next couple of weeks.
That said, bigger picture, we remain very optimistic this bull has farther to run, partially due to our still-positive market timing indicators (the intermediate- and longer-term trends are pointed up, and sentiment remains decidedly unenthusiastic), but also due to a continued string of rare, bullish studies that point to higher prices ahead.
We wrote about one of them (courtesy of Ned Davis Research) in last week’s issue—after stocks and bonds both do terrific over a six-month stretch, stocks almost always continue higher, with heady gains over the next six to 12 months.
And last Friday, one of our own indicators gave a green light—our 7.5% Rule has triggered, which occurs when the S&P 500 closes a week at least 7.5% above its 35-week moving average for the first time in at least nine months. (We also require at least one close below the 35-week line since the last signal; in effect, we’re looking for a surge of buying that occurs after a long dead period or correction.)
The 7.5% Rule has flashed just 11 other times since 1980 (once every three and a half years or so), and as with other blastoff indicators, what happens afterwards is impressive: Not only does the S&P see solid gains (rallying as much as 10.4% six months later, on average), but there were hardly any pullbacks after the signals (2.1% average maximum retreat).
Of course, there are no guarantees in the market, and the 7.5% Rule (or any other indicator) is no reason to start throwing money at stocks willy-nilly. But going with the evidence, this bull market is likely to continue in the months ahead, albeit with the usual pullbacks, shakeouts and bouts of rotation to keep investors uneasy.
In the Model Portfolio, most of our stocks are acting well and we’ve been slowly putting money to work as opportunities arise. We’re close to putting another chunk of cash to work, but tonight we’ll stand pat, thinking further near-term weakness is more likely than not. Our cash position stands at 23%.
Model Portfolio
Blackstone (BX 46) has begun to pull in after stretching as high as 48 last week. In the near term, next week’s earnings release (due a week from today, July 18) will be important, so we can’t rule out some further weakness. But all of the evidence here—from the story to the numbers to the chart—tell us the most likely path for this leading bull market stock is up. We’ll stay on Buy, but new buyers should keep positions on the small side this close to the report. BUY.
Chipotle Mexican Grill (CMG 740) continues to find some resistance in the 750 area, part of which is probably due to some hesitation in front of earnings (due July 23). So far, the action is normal—shares are hovering north of their April-May highs, above their moving averages and have seen no big-volume selling—so we’re sticking with our Buy rating. Looking ahead, a drop below 700 on earnings would probably have us going back to Hold, while a drop all the way into the 640 area could have us getting out. But right now, CMG is in good shape. BUY.
Coupa Software (COUP 135) is off to a good start for us, pushing nicely higher over the past few weeks. The company has been quiet on the news front since earnings (early June) and its expansion of its Coupa Pay offering (teaming with big firms like Citi Commercial and PayPal in mid June), but that’s been enough to keep investor perception on the rise. New buyers should aim for dips of a few points or a couple of weeks of quiet trading to let the 25-day line (now at 127 and rising quickly) catch up. BUY.
Okta (OKTA 137) has shaken off its mid-June wave of distribution, rebounding back to new price highs this week, albeit on subpar volume. Sector-wise, we’re pleased to see some of OKTA’s peers act better, with a few setting up nicely and some pushing to new highs as well. Our thought process here remains the same—given the stock’s huge run over the past couple of months, we could book partial profits if sellers flex their muscles, though we’re aiming to play out most of our shares for what we think can be a bigger, longer-term run as Okta’s identity solutions position it as an emerging blue chip-type of operation. BUY.
Planet Fitness (PLNT 77) snapped back from 70 to 77 after its huge late-June selling wave, which was good to see, though it’s since stalled out just under resistance. Still, the bottom line is that the intermediate-term trend is basically sideways, though the longer-term trend (of the stock, and of course the business) remains solidly up. We sold half during the pullback, and are content to give our remaining smaller position (a bit more than 5% of the portfolio) room to breathe. HOLD.
As we wrote above, in the short term, we wouldn’t be shocked to see the ProShares Ultra S&P 500 Fund (SSO 131), which moves about twice the daily percentage of the S&P 500 (up or down), hesitate or pull back a bit—the S&P has had a good run and is now testing round-number resistance near 3,000. But the odds strongly favor the general market seeing nicely higher prices in the months ahead, with the 7.5% Rule green light the latest positive sign. If you own some SSO, hang on, and if you don’t, we’re fine buying here or preferably on weakness. BUY.
Snap (SNAP 16) looks solid, nosing out to new highs today despite a generally soft session for growth stocks. We’re optimistic the company and stock have turned the corner, with a unique proposition with advertisers given the demographics of its user base. We added a half position last week, and are content to sit with that and see how the stock digests earnings, which are due out July 23. BUY A HALF.
Happily, Twilio (TWLO 144) held support last week and rallied back toward its highs near 150. It’s not super-strong, and a drop back through 135-ish would probably have us going to Hold. But the chart has been trending up, selling pressure has been light throughout TWLO’s three-month choppy period and we continue to see this name as one of the top growth leaders in the market. Fundamentally, the company is beginning to integrate and expand on its email capabilities (thanks to its acquisition of SendGrid), adding automation and testing features to boost content control and deliverability. BUY.
Zillow (Z 49) was on a hot streak in recent days but hit a good-sized pothole today due to competitive worries—Redfin said it teamed up with Opendoor (which also offers to buy homes from consumers) to allow users to get an offer for their residence through Redfin’s site and apps. This sort of thing wasn’t unexpected; long term, there’s room for more than one player in the home-buying market, obviously, and the key to success will be scale and execution, which Zillow has a leg up on. Back to the stock, Z had just surged from 43 to 51 over 10 days, so today’s retreat wasn’t abnormal. (Z remains a couple of points above its 25-day line, in fact.) We actually think the dip could be providing a decent entry point—if you don’t own any, you could buy a half-sized position here. For our part, if Z stabilizes soon, we could average up, but tonight we’ll simply hold onto what we have. BUY A HALF.
Watch List
Carvana (CVNA 65): CVNA continues to etch a reasonable base. We’re willing to be patient here, thinking this consolidation could lead to a powerful, sustained advance—if business continues to hum. Earnings are due out August 7.
Guardant Health (GH 90): GH is about four months into a good-looking post-IPO base. The stock’s a bit thin and wild, but we think the firm’s liquid biopsy testing platforms could produce massive growth for years to come.
Inphi (IPHI 58): We’ve never been huge fans of chip stocks, but after a huge spring correction, the sector is bouncing back, and Inphi has one of the better charts (new highs!) and stories—it’s the leading provider of high-speed interconnects between and inside of data centers.
Novocure (NVCR 69): NVCR remains a name we’re very interested in, as its Optune system should drive rapid sales and (next year) earnings growth going forward. The trick here is that earnings are due in two weeks (July 25), so we’ll hold off for now.
Roku (ROKU 105): Roku dipped sharply to its 50-day line, but held where it was supposed to and has rebounded nicely since. Earnings are likely out in early August. We could nab a half-sized position on any reasonable dip.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, July 18. As always, we’ll send a Special Bulletin should we have any changes before then.
