As the market continues its improbable march higher, some new leaders have emerged. CRM and PWR are two of my favorite.
Today, I’m going to tell you about two new leaders of this ongoing market rally: Quanta Services and Salesforce.com stock. But first, let me rewind the clock about two decades…
The Most Bullish Thing the Market Can Do
When I started at Cabot back in 1999, one of my first “tasks” was to read through all of the old issues of Cabot Market Letter (now called Cabot Growth Investor). I would eat lunch outside or head down to a local sub shop and take a binder of a full year’s worth of issues … starting back in 1970.
Our founder, Carlton Lutts, wrote all of the issues back then (Tim Lutts, who’s our Chief Investment Strategist, didn’t join the club until 1986), and as I read through all the advice, I’d obviously see repeated themes. One headline that appeared many times was simply: “The Most Bullish Thing the Market Can Do is Go Up.”
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Sounds insanely simple … so simple that my eyes initially would glaze over it. But in the stock market, it’s often the simplest things that work the best over time, and Carlton was telling subscribers what he had observed time and again—when the market is headed up, it usually keeps heading up far longer than most investors think.
This year has been a great example of that, with unusual (and, to the lay person, baffling) market strength portending even more strength down the road.
The first sign of this unusual strength came via a handful of blastoff indicators we follow, many of which flashed in late May and early June. The first one to turn green was our 90% Blastoff Indicator, which occurred when a whopping 90% of NYSE stocks rose above their 50-day lines (it actually got up to 95% in early June!). Such overbought markets ironically lead to further gains in almost all cases, and that’s what we’ve seen, with the big-cap indexes up well over 10% since then.
And just this week, I saw another study that points to strength leading to more strength. This one comes from Steve Deppe (you can follow him on Twitter @SJD10304), who ran a very simple screen that looked past times the S&P had risen at least 5% for two straight months, as it just did in July and August of this year. The results were stunning: Since 1950, it’s happened just nine other times, and the average maximum gain for the S&P looking out a year was 26%!
Just as encouraging was the fact that the average maximum loss after two 5% up months was less than 3%. That’s quite a risk-reward ratio.
To be fair, I don’t trade based on these one-off studies—nine occurrences during the past 70 years isn’t exactly a robust, time-tested system in my book. And it certainly doesn’t mean that the indexes can’t pull back and consolidate after their recent big runs. But the point is that strength tends to beget further strength, especially when you see unusual upside action.
As Carlton put it, the most bullish thing a market can do is go up.
Salesforce.com Stock and Quanta Services Stock
Drilling down into individual stocks, I’ve been a bit cautious for the past few weeks, not because of the general market, but mostly because the growth stocks I traffic in became hit-or-miss—starting in late July, many began corrections and consolidations after huge runs. This wasn’t super abnormal, but making money has been more difficult, which prompted me to pare back as money rotated elsewhere.
Now, though, many of these initial leaders (those that hit new highs maybe in April and May) have rested for six to eight weeks and are beginning to perk up again. Moreover, some of the fresher growth leaders (a few that have emerged during the past month or so) continue to act well and are also showing signs of letting loose on the upside.
To be clear, I still think the environment is trickier than it was two or three months ago. Fewer stocks are hitting new highs, sentiment is a bit giddy and many growth stocks are doing more chopping than advancing. Thus, it’s mostly about picking your spots and homing in on stocks that are showing buyable patterns.
Two ideas on that front. The first is Salesforce.com (CRM), the well-known cloud computing leader. It’s a bit big and older now, and indeed, despite doing a good business, Salesforce.com stock made no net progress from the fall of 2018 through May of this year. But the Q2 report was a barnburner (revenues up 29% from a year ago, while total money under contract was up 24%) and the stock’s reaction was an eye-opener, with CRM exploding to new highs on its heaviest daily trading volume since 2010! The tight action since then bodes well, too - Salesforce.com stock likely heads higher assuming the market remains in good shape.
On the cyclical front, I’m obviously seeing a lot of names rebounding well, but even more encouraging is that I’m seeing a lot of longer-term breakouts—stocks that have been range bound for two or three years and are now letting loose on the upside. One of my favorites on this front is Quanta Services (PWR), a construction and engineering outfit that offers a straightforward play on infrastructure work (electrical grids, pipelines, telecom, etc.) in the U.S. and elsewhere. Business hiccupped with the pandemic, but Q2 showed such a big recovery that earnings should be flat this year, with 2021 being very fruitful.
As for the stock, it did nothing from 2017 through the middle of this year, but it broke out powerfully on earnings at the start of August and has continued to move higher since. My guess is that the stock works its way nicely higher over time, with the usual potholes along the way, of course.
There are a number of other growth stocks acting well right now, of course. If you want to know which ones I’m currently recommending in my Cabot Growth Investor advisory, which has an average return of 69% on its current recommendations (all of which have been in the portfolio for less than a year), click here.
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