WHAT TO DO NOW: Remain mostly bullish. The Nasdaq and leading growth stocks had a stick save today, rallying nicely off support after a couple of bad days, while the broad market is improving. All told, our trend following indicators remain bullish and most growth stocks are still in good shape, so we’re sticking with our current stance. Our only change tonight is that we’re placing Universal Display (OLED) on Hold. Our cash position stands at 22%.
Current Market Environment
Growth stocks rebounded vigorously today after a bad start to the week. At day’s end, the Dow had risen 144 points while the Nasdaq bounced 88 points.
Last week’s issue was titled “Smoke, But No Fire (Yet),” but this week, we’ve seen a few flames, with the Nasdaq and leading growth stocks getting whacked on Monday and Tuesday. Today’s rebound, though, was impressive and came as many stocks tested support.
Let’s start with the good news. First, our trend-following indicators remain bullish, partly because the Nasdaq’s weakness hasn’t spread much to other areas of the market. In fact, this week has been one of rotation, with some beaten-down areas (energy, materials) bouncing and some other sectors (financials) pushing toward new highs even as money has flowed out of the leaders.
Also, we still have yet to see many leading growth stocks actually break down—some have, especially later-stage situations (i.e., stocks that have been running since the start of the year or even earlier). But most growth stocks are still in intermediate-term uptrends, and until that changes, it’s hard to take much action.
On the negative side, though, this week’s selloff/rotation comes on the heels of the early-June weakness, with many stocks (and the Nasdaq) hitting resistance near their prior highs. Some leading stocks have been having issues since mid-May, raising the odds of an intermediate-term top.
When you add it all up, here’s what we think. First, we still see this as a bull market—the longer-term trend is up, and even the intermediate-term uptrend is hanging in there thanks to the rotation we’ve seen this week (as opposed to across-the-board distribution).
With growth stocks, though, it’s best to take things on a stock-by-stock basis. Some stocks and sectors look very ragged, while others are consolidating calmly and look ready to resume their uptrends. The goal, as usual, is to trim or sell those that are cracking while holding (or nibbling on) the most resilient stocks.
As for buying, you can take a swing at a strong stock here or there, but it’s probably best to keep new positions on the small side for the time being. And we still think holding some cash makes sense until we see a clear resumption of the Nasdaq’s uptrend. New buying should be focused on our strongest stocks, which today include Alibaba, Tesla and XPO Logistics.
Our only change tonight is with Universal Display, which we’re moving to Hold given the stock’s lack of upside in recent weeks.
Alibaba (BABA 144) remains very resilient, hovering near its all-time closing highs. There’s been more hubbub lately from the analyst community that the company will be able to monetize its enormous and growing database of data behavior (based on clicks and buying patterns) through marketing products for large sellers on its site. It’s hard to know how large this will be, but it should gradually boost results in the quarters ahead. BABA has done about as good a job of holding up as you could ask for during the past three weeks. We’ll stay on Buy—if you don’t own any, you can buy some here or on any weakness. BUY.
Facebook (FB 153) has stalled out during the past couple of months, with shares hitting resistance in the 154 to 156 area on three occasions since early May. Overall, though, we don’t see much weakness or strength here, so Hold remains the appropriate rating. That said, with our big profit and the company’s increasing reach (it now sports a mind-boggling two billion monthly active users, and inked a deal with Fox to live-stream a dozen soccer matches), we’re willing to be patient. A drop below 145 or so would be an intermediate-term yellow flag, but right here, if you own some, sit tight. HOLD.
ProShares Ultra S&P 500 Fund (SSO 89) hasn’t done all that much during June’s growth stock volatility, gyrating between 89 and 91.5 for the most part. Still, the trend remains up, and while progress has been slow since early March, the odds favor the bull market taking this leveraged long fund nicely higher down the road. BUY.
Shopify (SHOP 91) is one of those stocks that’s been running since the start of the year (shares broke out on the third trading day of 2017), but it’s been stalling out since early May, with resistance in the 95 to 100 area proving a tough nut to crack. We don’t think SHOP’s long-term uptrend is over due to the huge story, big growth and the fact that the stock is only a few months into its uptrend. That said, we’re concerned that the stock is approaching a base-building phase. We’re not opposed to trimming a few more shares if you want to, but we’ll practice patience, giving the stock room to breathe. HOLD.
Tesla (TSLA 371) is high priced and thus its daily moves can be a bit scary, but the stock remains in great shape as it trades nicely above its 25-day line. Second-quarter production and shipment numbers, likely out next week, could move the stock; analysts are generally expecting 23,000 to 25,000 deliveries, though production levels will also be important. Whatever the case, the stock’s April breakout from a two-and-a-half year base, combined with its huge-volume acceleration higher in late May/early June, bodes well for the stock’s longer-term outlook. You can buy some here or on dips of a few points if you’re not yet in. BUY.
Universal Display (OLED 115) is being moved to Hold tonight simply because the stock hasn’t made any progress since its big earnings gap back in early May. That’s not terribly unusual—OLED has a history of moving big on earnings, and then chopping around for a few weeks—and the stock remains above support in the mid 100s. But with the environment for growth stocks a bit iffy, we’ll shift our rating to Hold and wait for the buyers to return. HOLD.
Veeva Systems (VEEV 62) has acted OK in recent weeks, dipping from 68 to 57, rallying back to 64 and now retreating to 60—a reasonable consolidation thus far. The longer it can hold up, the better the chance that VEEV’s longer-term uptrend will resume. We’re bumping up our mental stop to the 56 to 57 area (around the stock’s June lows), but above there, we’re happy to hang on. HOLD.
XPO Logistics (XPO 64) shot ahead to new highs today thanks to (a) a new Buy rating from an analyst that initiated coverage, but more importantly, (b) continued rumblings that CEO Bradley Jacobs could be closing in on another big acquisition, which most assume (given his history) would quickly prove accretive to cash flow. Moreover, the rotation we’ve seen into non-growth sectors (like transports) isn’t hurting the cause either. We still think XPO has great upside if management pulls the right levers—we’ll stay on Buy, though try to buy on dips of a couple of points. BUY.
Celgene (CELG 134): It’s not the newest story, but biotech stocks have come to life, and CELG again looks ready to be a big-cap leader in the space with consistent 20% to 25% growth likely for many years to come. Shares recently leaped to their highest levels since mid-2015 on very heavy volume.
PayPal (PYPL 54): PYPL broke out at 45, ran up to 55 and has spent June consolidating between 51 and 55. Sounds reasonable to us! It’s not the fastest horse but we think its gap up in April likely kicked off a sustained advance.
ServiceNow (NOW 109): Many cloud software stocks have traded resiliently in recent weeks, including NOW, which remains above its 25-day line and isn’t far from new high ground.
Zillow (Z 49): Z remains very intriguing, as the stock skyrocketed after the market’s early June weakness before being yanked lower this week. We still think it’s in a great position.