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The Cabot Emerging Markets Timer continues to give a Buy signal, but many stocks in both emerging and developed markets are trading sideways. We have no changes to our portfolio today.

Good news! Last week, the S&P 500 broke out of a sideways trading pattern, where it had been resting since the late-August U.S. stock market correction. The S&P could easily rise to 2,120 this fall—a 5% move—barring unforeseen bad news.

There are no new earnings reports, dividend changes or stock repurchase news to report, but I’m raising the rating on Adobe Systems (ADBE) from Hold to Buy, after the stock pulled back a little, and I’m lowering the rating on Universal Electronics (UEIC) from Strong Buy to Buy because the stock has had an aggressive run-up.

A correction is still possible, but the overall trend of the market is clearly up. I have no rating changes today, although I’m watching U.S. Bancorp (USB) closely after the bank reported mixed results this morning.

The market started the week off on a good note but looks like it’s going to finish it off on the downside, with the major indexes solidly in the red this morning following some hawkish Fed talk and North Korea’s nuclear test.

I will sell BK from the Buy Low Opportunities Portfolio today, representing an approximate 11% total return in 31 days

I want to highlight a hedging strategy that you may want to consider for your personal holdings.

I often get asked how I choose which order flow trades to follow and which to avoid. Two trades yesterday and today do a good job of illustrating my thought process:

LEAP Options on Oil Stocks

In my morning email today, I highlighted a large trade in Anadarko Petroleum (APC). This trade is referred to in the options trading world as a Butterfly. Here are the details of the trade:

With the market now down 1.25% on the day, some of our buy-writes are reaching, or breaking, our break-even levels. If this selloff continues, we may need to exit or adjust these positions. If we adjust our buy writes, we will likely close the call we’re short and sell another call, which will further lower our cost basis.

I get questions quite often about how I use stops. Some traders have hard and fast rules such as “If I’m down 25% (or 50% or whatever) on a position I exit immediately.” I really don’t have such rules.

After pushing into correction territory towards the latter part of January, the broad market seems, if only temporarily, to have found a foundation, as it rose four of the five days last week. The Dow gained 1.0%, the S&P 500 bounced 1.5% and the tech-heavy Nasdaq pushed higher by 2.4%. Year-to-date the Dow, S&P 500 and Nasdaq are lower by 3.4%, 5.6% and 9.9%, respectively.
Today, I’m adding specialty metals company Allegheny Technologies (ATI).

There have been some positive baby steps since the market’s early-December low, but there remain many yellow flags, too, such as the fact that growth-oriented funds and indexes remain iffy at best. All in all, we’re a smidge more constructive than we were a couple of weeks ago, but we don’t advise making any big commitments until we see more individual names let loose on the upside.

This week’s list is heavier on cyclical names, as those have been holding up (some even advancing) much better than the growth areas of the market. Our Top Pick is a shipping name that’s posting huge numbers and is near new highs.

Two weeks ago, we thought the market had likely hit (or would soon) a workable low--and that was right, with the major indexes and (more important to us) a good number of growth stocks perking up. It’s encouraging, but we can’t say we’re bullish yet: The trends of the market and growth funds are still down, and even things that have popped nicely aren’t set up quite yet. All in all, we’re sitting on our hands, but we’re also watchful--another few good days could change things, but at this point the odds still favor more time being needed as a bottom is built.

In the February Issue of Cabot Early Opportunities we take a quick look at the big-picture events influencing the current market then dive into five names that keep jumping onto my radar.
This month we take another spin with two names that served us well in 2021 and add a software company that has the potential to be a massive player in the digital economy. We also take half a stake in a watch list name and refresh that list with an exciting IoT company.


Enjoy!

The market remains under pressure, with our Cabot Tides and the “Growth Tides” (see more in this issue) negative, and even our longer-term Cabot Trend Lines on the verge of a sell signal. To be fair, we are starting to see some “real” extremes in terms of some sentiment and oversold measures, so we’re hopeful a bounce could get underway soon; we’re not ruling out some nibbling or re-jiggering in the Model Portfolio. But the main trends remain down, so our main advice is to stay mostly on the sideline and keep your watch list updated with potential fresh leaders.

As for market performance, speculative and growth areas continue to struggle while stocks tied to rising rates and cyclicals managed to garner the most attention from buyers. However, the recent short-term rally could see higher-beta areas come back into play.



Today, I’m adding Corning (GLW), which reported blowout earnings last week.

Markets rallied strongly last week, with growth stocks in particular showing strength, so the odds are improving that the recent correction is over and new highs are ahead. If so, today’s recommendation of a data-warehousing company will likely thrive.

As for selling, I have no recommendations today, just one downgrade to hold. And I’ll be following Tesla carefully, reading the quarterly report on Wednesday, and watching the stock’s reaction.



Details inside.

The market was in a normal, shake-the-tree correction for most of November, but the past two weeks have seen a massive wave of selling that’s cracked our Cabot Tides and scores of individual stocks. Yes, there’s a chance this could be a big news-driven shakeout (virus and Fed tapering worries, etc.), so we’re not sticking our head in the sand, but there’s no question the sellers are in control and many stocks are going to need a ton of repair work.

We’ve sold a bunch of names from the Model Portfolio in the past two weeks, and while we’re not opposed to adding a half position or two if the market finds its footing, we’re sitting tight with a large cash position tonight.