First, Some Good Cocktail Recipes
All My Thoughts on the Market
Shorting, New Leadership and Individual Stocks ---
Below I have all of my thoughts on the market, but first, I wanted to give a shout-out to the 20 of you who responded to my last Wealth Advisory, in which I asked everyone for their favorite summertime cocktails. I can honestly say not a one was a bust, and a few were very intriguing.
A couple to consider:
First, Barry in Connecticut gets the reward for most unusual: Fill a glass 2/3 with crushed ice, put in the gin of your choice to just float the ice off the bottom, add some bitters for taste and top off with champagne. It sounds odd, but I tried it over Labor Day and it was very refreshing (especially as we hit 90 degrees on Monday).
Another contribution I want to pass along is a Sangria recipe from long-time subscriber Fran—I’m not a huge Sangria guy but this one sounded great. I’m going to put this one together this weekend:
· 1 full bottle dry red burgundy (I prefer Asti brand but I’m sure any one would work just fine)
· 1 small bottle soda water
· 1/4 cup lemon juice
· 1 jigger of brandy
· 1 jigger Cointreau
· Thin slices lemon and orange to float in mix
· Sugar to taste
· Can mix all ingredients together ahead of time but add the soda water, ice and sugar last minute
· (4 times this recipe is enough for 14 servings.)
For my part, I’ll pass along a recipe that even my Chardonnay-drinking mother-in-law praised me on—a Curacao Cooler (although it doesn’t include any Curacao!):
· Fill a Collins or other highball glass with ice.
· Shake a shot of dark rum (I find Goslings works best), a shot of Cointreau and a shot of Rose’s sweetened lime juice (regular lime juice will be too tart) with some ice.
· Pour into the glass; it should fill about 2/3 of the Collins glass.
· Fill the rest with club soda, then stir gently (you want to keep some fizz there).
· The result in a tasty, sunset-looking cocktail that goes great with playing cards on the deck.
Thanks for all the ideas!
OK, with the important stuff out of the way, I want to run through all my thoughts on the market: What I’m watching now, some stock and sector ideas that are beginning to show relative strength, the possibilities of a bear market (and what that will entail) and exactly what would turn me bullish in the weeks ahead. As always, don’t hesitate to reply to this email with questions or comments.
Market Scenarios
• Overall, I’d say there’s just a small chance (10%?) that the market can begin a sustained, multi-month rally from here; never say never, but there’s so much overhead in the 2,050-2,100 area (S&P 500) and 4,900 to 5,100 (Nasdaq) that the odds are strongly against a big upmove starting now.
• On the other hand, I would guess there’s a 50% chance we’ve hit a low that will be re-tested successfully in the weeks ahead, leading to a sustained advance.
• A big reason for that is that the selling on Monday, August 24 (when the Dow closed down 588 points but was down 1,000 points in the morning) resulted in some panic breadth readings. A massive 1,336 stocks hit new lows on the NYSE that day, and about 85% of NYSE stocks closed below their 200-day moving average. Those readings are often seen near multi-month lows … though they usually lead to re-tests a few weeks down the line, with some of those measurements improving on the re-tests.
• But I would also guess that there’s a 40%-ish chance we’ve started a bear phase in the market that will take a few months to play out.
• “But Mike, a bear phase sounds scary. Are we in for another crash like those from 2000 and 2008?” I highly, highly doubt it. Even if we have started a bear phase, the odds are strongly against a third historic downturn. Much more likely would be a garden-variety bear market of 20% to 25% that lasts three to six months. That’s not a prediction, but it’s a fact those huge meltdowns come when few are expecting it; these days, everyone’s on the lookout for the next bubble.
• Overall, though, the key isn’t to assign exact percentages to every scenario, but to just stay in gear with what’s going on. Right now, I advise defense, and using rallies as a chance to unload broken stocks and raise cash if you’ve yet to do so. When my timing indicators (which follow the intermediate- and longer-term market trends) turn back up, I’ll be as bullish as anyone, but right now, caution is advised.
Shorting
• What about the short side? I’m not opposed to it, but if you short, it’s best to (a) stick with ETFs of major indexes (either shorting things like SPY, QQQ or IWM … or buying the inverse ETFs that move opposite the market), (b) short only after sharp bounces of a few days, (c) take profits relatively quickly and (d) always use loss limits in case you’re wrong.
• Right now, if you really want to short, a rally back up to the highs of the past couple of weeks (maybe around 200 on SPY?) could provide an opportunity. We saw how strongly that level brought out the sellers on Wednesday morning.
• Most of all, though, remember that the big gains will be made by purchasing new, leading growth stocks when the market eventually turns up. Shorting can make you a few bucks, but it’s not where the big money is.
• That’s why I’m unlikely to be advising much (if any) shorting in Cabot Growth Investor or Cabot Top Ten Trader—the reward of a 10% to 20% gain isn’t much greater than the potential risk. Still, shorting can be a way to hedge your exposure if you want to do that.
New Leadership
• Today, we’re about two and a half weeks from the August 24 low. Even if the market is now building a bottom, it’s still early to identify new leadership. Why? Because new launching pads are likely to take longer to form.
• When looking for resilience, I like to see stocks holding up well and/or snapping back very quickly after selloffs.
• That said, so far, I’m seeing resilience in three main groups—construction (which has a history of ignoring the broad market’s action), medical (which offers a combination of growth and defensive characteristics) and select retail ideas (consumer spending remains solid and gas prices remain low).
Individual Stocks
• Of the three areas, I definitely think construction (homebuilders, home products suppliers, raw materials, etc.) is a group to watch. I’ve owned Martin Marietta Materials (MLM)—a leading producer of construction aggregates—in Cabot Growth Investor for a few months and it still acts well today.
• D.R. Horton (DHI) looks like the leading homebuilding stock; this group rallied nicely in 2001-2003 despite the poor market, and sagged even after the bear market ended in 2009. Thus, DHI (and the group) can dance to its own drummer; it can do decently even if the market remains rough.
• Recent IPOs (those in the past year) are another area to watch for new leadership. These stocks aren’t well known yet, which means there are lots more potential buyers than sellers. HealthEquity (HQY), Planet Fitness (PLNT) and Adeptus Health (ADPT) are three to watch.
• Lastly, when putting together your watch list (you are putting together a watch list, right?) it’s good to keep an eye on some highly liquid growth stocks that (a) have done a lot of consolidating during the past couple of years, (b) are holding up very well and (c) have big earnings estimates in 2016 and beyond.
• Here are three of my favorite names in this super-liquid space:
Celgene (CELG), which should see its bottom line rise 25% a year for the next few years regardless of what the economy does. The chart isn’t amazing but shares are holding above support in the broad 105-115 area from earlier this year.
Facebook (FB), which is less than 10% or so off its peak and should see earnings begin to surge in 2016 as costs level off and monetization of Facebook and Instagram continue.
Amazon (AMZN), which, after a multi-year spending spree kept earnings under wrap, is expected to see the bottom line soar in the quarters ahead (possibly up to $5 per share next year). The stock has actually pulled back normally during the past six weeks, which is saying something.
That’s all my thoughts for now. Feel free to reply to this email with any questions or comments!
If you want my continuing thoughts on the stocks I recommend (including when to buy more or sell some), I suggest that you give Cabot Top Ten Trader a try.
