WHAT TO DO NOW: All three of our market timing indicators remain positive, yet most major indexes are now going on their eighth weeks of no upside progress. We still think the next major move is likely up, but until the market gets going, you should be selective on the buy side and keep losers and laggards on tight leashes. In the Model Portfolio, we’re going to place Charles Schwab and Martin Marietta on Hold tonight, though we’re also placing Facebook back on Buy. Our cash position remains at 18%.
Current Market Environment
The major indexes finished mixed today, with the Dow closing down 36 points while the Nasdaq gained 8 points.
When it comes to the overall market, our first thought is that most indexes have basically gone nowhere for nearly two months. That kind of sideways, choppy trading is obviously having an impact on individual stocks—most have been unable to sustain any upside, and we’re starting to see more and more turn sloppy and a few break down.
Accordingly, you should be selective on the buy side. If there’s a good setup, by all means take it. But you don’t want to do a ton of buying when most stocks are simply marking time or worse. And it’s also best to have tight stops on your losers and laggards should the market’s loss of momentum lead to a real correction.
With that in mind, we’re placing two of our stocks on Hold tonight and are keeping them on tight leashes, though we’re also placing one Hold-rated stock back on Buy.
That said, while we’re taking a cautious step today, we don’t want to give the impression we’re leaping into the bear camp. All three of our market timing indicators remain positive, most indexes are within shouting distance of all-time highs (especially the Nasdaq, which is by far the best-looking index) a bunch of growth stocks are still set up well and most recent earnings winners have held their gains.
Thus, it’s a balancing act right here. We remain mostly invested, and the evidence still tells us the next major move is likely up; if the market has a good couple of days, there are many stocks (including a bunch we own) that could begin or resume uptrends.
But as long as the market chops sideways in this neutral trend, stocks will be more vulnerable to breakdowns, while little money is made on the upside. We’re sticking with our current crop of stocks, but are moving two to Hold that have recently shown some suspicious action. Details below.
Model Portfolio
Charles Schwab (SCHW 39) was looking great, but out of the blue the company decided to chop its online trading commission rate to $6 (from $8), which should take away about $15 million per month in revenue. That caused a big plunge in most online brokerage stocks, including SCHW, which gapped below its 50-day line and has stayed there over the past few days. The main uptrend is intact, and earnings estimates are still healthy (up 22% this year and 23% in 2018), so we’re not panicking; in fact, if SCHW can hold up, we think this could be one big shakeout that leads to higher prices. But given the action of the stock, we’ll go to Hold and watch support in the 37 to 38 range; a push back above 41 or so would be a sign the uptrend is likely resuming. HOLD.
Facebook (FB 134) reported a very solid quarter last week, with revenues up 51%, earnings up 78% and daily active users rising to a mind-boggling 1.23 billion (up 18% from a year ago). As for Instagram, it has 400 million daily active users of its own, and a half million businesses are now advertising on that platform. Management did guide toward 2017 being a heavy spending year (cash operating expenses should rise more than 50% this year), but analysts had largely factored that in; earnings estimates have risen a bit since the quarterly report (up 28% this year and another 24% next year). As for the stock, it had a wild one-day reversal, but has begun perking up since (including today, as Facebook competitor Snapchat’s financial filings didn’t put the firm in the greatest light), and while the relative performance (RP) line is still shy of its old highs, we’re going to go back to Buy as it appears the trend has turned up. If you’re buying a new position here, a stop in the mid 120s makes sense. BUY.
Freeport-McMoRan (FCX 16) is a good example of what we’re seeing among many stocks in recent weeks—FCX corrected sharply in December, rallied for much of January (including a brief poke out to new highs) before falling on elevated volume over the past few days. Granted, there’s been news here, including the company’s mediocre quarterly report and the firm’s never ending uncertainty surrounding its Indonesian mine. We’re using a mental stop around our entry point (near 14.6); we don’t want to ride FCX any lower than that. But right here, with the stock above its 50-day line, we’ll stay on Buy, thinking this dip will eventually lead to higher prices. BUY.
Martin Marietta (MLM 226) has been dented the past two days after its peer Vulcan Materials’ Q4 report missed estimates badly. (Martin Marietta will release its own report next Tuesday, February 14.) The action is disappointing, and given the failed breakout from two weeks ago, we’ll switch our rating to Hold. That said, there remains a lot of support in the 220 range, so we’re comfortable giving it a chance heading into earnings. HOLD.
Netflix (NFLX 145) is acting just fine, with shares tightening up following its modest post-earnings gap, and then nosing to new highs on decent volume yesterday. We don’t expect the stock to be the barnburner it was in its younger days, but with earnings showing humongous growth and with the stock just recently tapping new highs after a year-long rest, we think big investors will continue to accumulate. BUY.
ProShares Ultra S&P 500 Fund (SSO 80) doesn’t look bad at all—it’s hovering just south of all-time highs, just like the S&P 500. True, it also hasn’t made much progress for the past couple of months (it’s up just over a buck since December 13), but with the trend up, we’ll stay on Buy. BUY.
Shopify (SHOP 53) broke out of a multi-month base on huge volume in early January and has been grinding higher since, which is good to see. The big event will be earnings next Wednesday, February 15; a positive reaction would confirm that SHOP is a new leader, but we’ll have to see how it goes. We’ll stay on Buy, but it’s best to keep any positions small this close to earnings. BUY.
XPO Logistics (XPO 45) remains stuck in the mud here—not particularly weak, but also unable to show strength for more than a couple of days at a time. It’s a close call, but we’re going to stay on Buy here, partly because there’s firm support in the low 40s, partly because of the light selling volume in recent weeks, and partly because XPO has a history of going quiet like this before resuming its uptrend. A drop to 41 or so would probably have us bailing. Earnings are due out February 22. BUY.
Watch List
Alibaba (BABA 104): BABA continues to work on a good-looking launching pad. We’d like to see a bit more upside power from the stock and RP line, but we still think the stock will be a liquid leader some day—possibly soon.
Inphi (IPHI 49): Inphi is a bit thinly traded and is very squiggly, including its wild intraday action following earnings today. But the bottom line is that growth remains rapid as demand for the firm’s high-speed networking products is strong, and the stock is near new-high ground.
ServiceNow (NOW 90): ServiceNow is one of the old favorites we mentioned in last week’s issue that’s starting to come back to life. We’d like to see a decisive upmove from here, and maybe play the first pullback after that.
Tesla Motors (TSLA 262): TSLA remains under accumulation, though earnings are due out in a couple of weeks and the chart has resistance not too far above the stock’s current level. Definitely worth keeping on the Watch List.
Texas Capital Bank (TCBI 83): A bank stock doesn’t usually get us excited, but Texas Capital has growth numbers that would make many technology companies jealous, and the stock has pushed to new highs following earnings.
Yelp (YELP 41): YELP has quieted down just south of new highs. Earnings are due out tomorrow, and a powerful, positive reaction could have us buying.
