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Current Market Outlook


The market is coming off another very solid week, with the major indexes tagging higher highs on solid volume and the early returns from earnings season generally positive. It is fair to say the advance is becoming more selective, with some factors (bad earnings, rising interest rates, falling U.S. dollar) causing certain areas to stall out. Overall, we remain bullish, especially in the longer-term, as this recent unusual strength has historically portended good things down the road. In the near-term, though, you should be taking things on a stock-by-stock basis, ditching stocks that break their intermediate-term uptrends and looking for buying opportunities either on shakeouts (in established leaders) or earnings blastoffs.

This week’s list has everything from turnarounds to speculations to recent earnings winners—there’s a lot to like here. Our Top Pick is AbbVie (ABBV), which has been a steady liquid leader in the biotech space and just popped on earnings.

Stock Name	Price	Buy Range	Loss Limit
AbbVie Inc. (ABBV)	93.53	117-123	106-109
G-III Apparel (GIII)	45.25	37-39	33.5-35
Helmerich & Payne (HP)	63.68	70-74	63-65
Ligand Pharmaceuticals (LGND)	267.14	161-167	147-151
Neurocrine Biosciences (NBIX)	123.40	86-90	77-79
Shopify (SHOP)	585.00	122-128	108-112
Spectrum Pharmaceuticals (SPPI)	19.31	21.5-23	19-20
Sprouts Farmers Market (SFM)	19.00	26-28	24-25
Varian Medical (VAR)	118.33	122-126	113-115
Weibo (WB)	98.16	128-134	115-118

Current Market Outlook


We can’t complain about the market’s action recently—the major indexes have (at the very least) held the strong gains of the past couple of weeks, with the strongest among them (like the Nasdaq) pushing higher. And many individual stocks (especially growth stocks) look vibrant, which is a plus. That said, we can’t conclude that the bulls are back in control, as most major indexes are still hovering around their 50-day lines, and in the broad market, the number of stocks hitting new highs (even on the strong Nasdaq) remains very low. We’re close to an all-clear signal, and think it’s fine for you to hold your strong stocks and do a little buying here or there. But right now, we’re keeping our Market Monitor at neutral until we see confirmation of an uptrend.

This week’s list has a ton of good stories and charts, with growth stocks well represented. It’s hard to pick just one, but we’ll go with Red Hat (RHT), which looks like a big-cap leader of the leading software group.

Stock Name	Price	Buy Range	Loss Limit
Arch Coal (ARCH)	82.27	95-99	87-89
GoDaddy (GDDY)	0.00	58-61	53-55
MuleSoft (MULE)	0.00	28.5-30.5	26-27.5
Netflix, Inc. (NFLX)	423.92	280-290	255-260
Planet Fitness (PLNT)	0.00	34-36.5	31-32.5
Red Hat (RHT)	0.00	142-148	130-134
TAL Education (TAL)	50.49	35-37	32-33
Twilio (TWLO)	183.39	31.5-33.5	28-29.5
Vale S.A. (VALE)	15.40	13.7-14.5	12.6-13
Zendesk (ZEN)	82.19	40.5-42.5	36.5-38

The market isn’t in awful shape, but it’s not in as good shape as the major indexes would have you believe—the advance has been narrowing for a while now, and last week, as the Dow and S&P leapt to new highs, many stocks and sectors lagged behind. It’s not the end of the world and there’s nothing that says the market can’t chop around for a bit, get its act together and march higher; we’re certainly not advising you to sell everything. But given the evidence, and the fact that earnings season picks up this week, we think it’s best to keep our Market Monitor in neutral territory and see what comes.

Backing up that thought is this week’s list—there are a few very enticing ideas, but it’s not exactly chock-full of young whipper-snappers. Our favorite of the week is GameStop (GME), a stock that’s strong because of industry-specific factors that should boost earnings later this year.

Stock Name	Price	Buy Range	Loss Limit
Yahoo (YHOO)	0.00	23-24	21.5-22
Tesla, Inc. (TSLA)	818.87	40-42	35-36
Toyota Motor (TM)	0.00	105-110	98-100
Regeneron Pharmaceuticals (REGN)	512.96	195-205	180-185
Omega Healthcare Investors (OHI)	0.00	30.5-31.5	28.5-29
International Paper Company (IP)	0.00	45-46	42-43
GameStop (GME)	0.00	29.5-31	27-28
Avis Budget Group (CAR)	0.00	26-28	24-25
BlackRock (BLK)	0.00	250-260	240-245
BE Aerospace (BEAV)	0.00	58-60	55-56

If you’re invested in leading growth stocks, you’re probably doing very well; many of them have been shooting ahead, and on big volume to boot! That said, the broad market still isn’t acting right, and the longer that goes on, the greater the chance of some potholes in the days or weeks ahead. We’re not anticipating anything drastic, and we think holding your strong, profitable stocks is your best move. But we’ll continue to keep our Market Monitor just shy of bullish territory—holding some cash and picking your spots is important, especially with so many stocks extended to the upside.

This week’s list has many newer names (to us), which could reflect the start of a rotation into some previously stagnant groups. Our favorite of the week is Energen (EGN), one many good-looking energy stocks out there; we think it’s a solid buy here or on any weakness.

Stock Name	Price	Buy Range	Loss Limit
YY Inc. (YY)	0.00	44-46	38-39
Pinnacle Entertainment (PNK)	0.00	22-24	19-20
Nu Skin Enterprises Inc. (NUS)	46.07	86-90	76-78
Micron Technology, Inc. (MU)	43.31	14.5-15.5	13-13.5
Lear Corp. (LEA)	0.00	69-71	66-67
Halliburton (HAL)	0.00	48.5-51	45.5-46
Evercore Partners (EVR)	0.00	47.5-49	44.5-45
Energen (EGN)	77.04	67-70	62-63
Infoblox Inc. (BLOX)	0.00	39-41	33-35
Aegerion Pharmaceuticals (AEGR)	0.00	90-94	84-85

The major indexes continue to act very well; today’s pop higher is par for the course. That said, the hot growth stocks of the past few weeks are starting to take a breather; there hasn’t been much abnormal selling, but new buying is being focused on some other groups. Moreover, investor sentiment has, by our measures, become elevated, which raises risk. Altogether, we’re leaving our Market Monitor where it has been. Continue to keep your feet on the ground and try to do your buying on weakness, or in stocks that are recently emerging from multi-week pauses.

This week’s list has a bunch of newer names to Top Ten, or at least stocks that haven’t appeared in a couple of months or longer. Our favorite is Five Below (FIVE), a small but exciting growth company whose stock just popped out of a long consolidation.

Stock Name	Price	Buy Range	Loss Limit
Swift Transportation (SWFT)	0.00	19-20	18-18.5
Qihoo 360 (QIHU)	0.00	79-84	68-69
Ocwen Financial (OCN)	0.00	54-56	49-50
Melco Crown (MPEL)	0.00	29-30.5	25-26
Cheniere Energy (LNG)	63.82	30-32	25-27
Gulfport Energy (GPOR)	0.00	60-63	53-55
Five Below (FIVE)	134.58	45-48	41-42
Dril-Quip (DRQ)	0.00	107-111	101-103
Concur Technologies (CNQR)	0.00	105-110	88-90
ACADIA Pharmaceuticals (ACAD)	47.84	22-23	19-20

Last week was a decent one for the market, though much of the strength was concentrated in defensive-type sectors (consumer durables, health care, etc.), and today, as the second quarter began, the sellers re-appeared. As we wrote last week, the overall trend remains up, so we’ll leave our Market Monitor in bullish territory, but there are a few yellow flags out there that could have an effect. All told, we see a good number of decent set-ups, but we are also seeing more stocks stagnate and some fall by the wayside. Hold your best performers and do some selected buying, but don’t hesitate to dump your losers and laggards and hold a little cash at this point.

This week’s list does have a bunch of high-quality names with strong charts, something that’s usually a good sign for the market. Our favorite of the group is Trinity Industries (TRN), the leading railcar maker that’s part of the still-strong transportation group. We think it’s a good buy around here or on further weakness.

Stock Name	Price	Buy Range	Loss Limit
Trinity Industries (TRN)	0.00	44-45.5	41-42
Proto Labs (PRLB)	0.00	46.5-49	43-44
Pandora Media Inc. (P)	0.00	13.2-13.7	12-12.5
LinkedIn Corporation (LNKD)	0.00	168-174	155-158
Kansas City Southern (KSU)	176.54	105-110	99-100
Cabot Oil & Gas (COG)	0.00	65-67.5	59.5-60.5
CBRE Group (CBG)	0.00	23.5-24.5	21.5-22.5
Biogen (BIIB)	0.00	185-190	160-165
Bonanza Creek Energy (BCEI)	0.00	37-39	34-35
Activision Blizzard, Inc. (ATVI)	0.00	13.5-14.5	12.8-13.3

The selling pressures have been spreading during the past couple of weeks, moving from just the highfliers of the past year to much of the broad market. Most stocks (especially growth stocks) have suffered severe damage on their charts, and that will take time to repair; the odds are against a sustained rally from this point. That said, a few commodity-related groups continue to trade well, including a bunch of energy stocks that are beginning to push higher—they could prove to be new leaders if the market stabilizes. Overall, you should remain in a defensive stance because the overall trend is down, but buying a little of a resilient name or two is OK.

This week’s list is very heavy on commodity names, and our Top Pick is Athlon Energy (ATHL), a fast-growing producer in the Midland Basin. Its recent land grab is helping the stock push out from its first-ever base.

Stock Name	Price	Buy Range	Loss Limit
Zillow (Z)	76.64	85-90	77-79
Stillwater Mining (SWC)	0.00	15-16	14-14.5
Pacific Ethanol (PEIX)	0.00	13-14.5	11-12
Huntsman (HUN)	0.00	23-24.5	20-21
HDFC Bank Limited (HDB)	0.00	38-40.5	33-34
HD Supply Holdings, Inc. (HDS)	0.00	24-25	22-22.5
Diamondback Energy (FANG)	0.00	65-67	61-62
Concho Resources (CXO)	0.00	122-127	118-119
Athlon Energy (ATHL)	0.00	36.5-39	34-35
Archer Daniels (ADM)	0.00	43.5-44.5	41-42

Sizing up a merger arb opportunity requires more than just garden variety equity analysis. In his famous letter to Berkshire Hathaway shareholders in 1988, Warren Buffett laid out four questions to answer regarding arbitrage situations:

1. How likely is it that the promised event will indeed occur?
2. How long will your money be tied up?
3. What chance is there that something still better will transpire – a competing takeover bid, for example?
4. What will happen if the event does not take place because of anti-trust action, financing glitches, etc.?

Today, we add a new Cabot Turnaround Letter recommendation that we think comes close to answering all four.

Defense contractors have been beaten down for years, but several of them now look like good turnaround stocks. These six appear intriguing.

We’ve all heard the personal finance advice on how saving can allow you to live comfortably in your golden years.

Housekeeping: As the holidays get underway, just a heads up that we’re going to send the next issue of Cabot Growth Investor next Wednesday, Christmas Eve, December 24, likely midday.

WHAT TO DO NOW: Remain cautious. Growth stocks tried to come out of their corrective phase following the mid-November low—but that bounce has faded, with our Growth Tides and Aggression Index still struggling. We’ve gone slow of late, holding half the portfolio in cash, and tonight we’re going to mostly stand pat and look for signs the correction will end. Our only change tonight is placing CrowdStrike (CRWD) on Hold.

WHAT TO DO NOW: Remain bullish, though we are seeing more crosscurrents pop up. The big-picture evidence remains positive, so we’re holding most of our winners, but we’re also comfortable holding some cash as earnings season progresses. We’re watching a few of our names closely (as well as many names on our watch list), but tonight we’ll hold our 23% cash position and have no changes.

WHAT TO DO NOW: Hold your strong stocks, but near-term, it’s OK to sit on your hands a bit and see how things shake out. The overall evidence remains bullish, but there have been some yellow flags of late and yesterday’s broad, sharp decline is likely to have some near-term reverberations. We took partial profits in Arista (ANET) yesterday, selling one-third of our shares, and placed Pulte (PHM) on Hold, leaving us with around 33% in cash—and some great performers. We’ll stand pat tonight, though if things settle down for a couple of days, we could put some of our cash back to work.

Small caps raced to multi-month highs early last week and, despite the weakness in the tech-heavy Nasdaq this week, small caps are holding up relatively well.

The iShares Core S&P Small-Cap ETF (IJR) is trading right around 114, which was the zone of overhead resistance in July that the index punched through last Wednesday.

Historically, small caps – and especially small-cap value stocks – have tended to do well during the beginning of rate-cutting periods. This puts a lot of pressure on Fed Chair Jerome Powell’s speech tomorrow in Jackson Hole.

Gold hit $4,000 an ounce and the signal this is sending is not hard to grasp.

Investors are enjoying stock gains but are hedging downside currency and stock price risk as well as a hedge on growing government debt and geopolitical risk. Gold seems the most popular safe haven as it is viewed as a safe harbor asset in a way that the greenback used to be viewed. Gold’s rally began almost three years ago, fueled by central banks and Chinese investors leery of both its stock and property markets.

WHAT TO DO NOW: The market is still singing a similar tune, with the big-cap indexes looking fine (and, now, some broader indexes looking better), but growth stocks remain tricky, with many names marking time and more looking iffy. In a special bulletin yesterday, we took partial profits in GE Aerospace (GE), and tonight we are moving Rubrik (RBRK) back to Hold as it’s been unable to escape the weak sector action. That will leave us with 43% cash, which we’ll sit with for now, though we could put some to work in some of our strong performers if growth stocks can perk up.

Good gracious, last week was volatile for the market as the indexes moved violently day-to-day. Yet, by the close of trading on Friday the S&P 500 and Dow were only down marginally on the week, while the Nasdaq had declined by 1.5%.