Mike Cintolo (mike@cabotwealth.com)
Twitter: @MikeCintolo
WHAT TO DO NOW: Remain mostly bullish, but hold a little cash to respect the market’s growing divergences. Our market timing indicators are still mixed, though the long-term trend and growth stocks remain in good shape. In the Model Portfolio, we’re going to buy another half-sized position of Tesla (TSLA) because the stock has resumed its uptrend, but we’ll sit tight with our remaining cash position (16%) for now.
Current Market Environment
The major indexes finished down modestly today, though most growth stocks did pull back some. At day’s end, the Dow was down 21 points while the Nasdaq eased 5 points.
The market’s rebound from its sizable May 17 correction has pretty much gotten us back to the environment that’s mostly been in place for the past couple of months—a narrow advance with growth stocks and the Nasdaq in the lead, while most of the rest of the market stagnates.
Our indicators are generally unchanged from last week’s issue. The longer-term Cabot Trend Lines are clearly bullish, but the intermediate-term Cabot Tides are mostly on the fence (call it slightly tilted up if you want) while our Two-Second Indicator is unhealthy, with the number of stocks hitting new lows approaching 100 today.
As we wrote in last week’s issue, the two most important factors to us are the longer-term trend and the action of leading growth stocks (which is what we generally invest in). Both of those are positive, which is why we remain mostly bullish.
That said, we’re also keeping our feet on the ground, as the market’s divergence (seen in both the indexes and our Two-Second Indicator) raises the risk of either a market retreat, or a rotation out of growth and into some lagging areas.
Tonight, we’re following our plan and buying the second half of our position in Tesla (TSLA) as the stock has resumed its uptrend. But we’ll Hold our remaining cash position (16%) for the moment as we watch some potential setups and our market timing indicators.
Model Portfolio
Alibaba (BABA 122) remains in good shape as it hovers in the low 120s following its big shakeout-and-recovery on earnings two weeks ago. We like that analysts have bumped up their estimates further since the quarterly report; the bottom line is expected to rise 26% this year and 29% next, though both figures are likely conservative. We continue to see BABA as a liquid leader, and its recent push to new all-time highs bodes well. If you’re not yet in, try to buy on dips toward 120. BUY.
Facebook (FB 151) has bounced nicely off its 50-day line during the past two weeks, though it did meet with some distribution today as it approached its old high. We’ll stay on Hold for the moment because FB isn’t quite as strong as some other growth stocks, but it’s a very solid Hold here if you own some. HOLD.
Netflix (NFLX 163) continues to act well as it consolidates near new high ground. One analyst recently opined that long-term earnings estimates for Netflix (looking out to 2020) could be dramatically conservative if the company’s international business continues to crank ahead as it has in recent quarters. As long as the market holds up, NFLX looks like a good buy here or on dips of a few points. BUY.
ProShares Ultra S&P 500 Fund (SSO 89) nosed to new highs last Thursday, tapping the 89 level (versus its March 1 peak of 87.6), though it’s pulled back so far this week. Our thinking here remains the same—long-term, we’re optimistic this is still a bull market, but with the trend mostly sideways in the S&P 500, we’ll keep our remaining shares for now (we sold half two weeks ago). HOLD.
Shopify (SHOP 92) has calmed down nicely in recent days, raising the odds that many weak hands were knocked out during the stock’s wild action two weeks ago. The company’s Shopify Pay offering for merchants looks like a big hit—it allows shoppers to save all their shipping and payment info with Shopify, and then quickly recall it when they shop at another merchant powered by Shopify. The result: A much faster checkout process and (most important) fewer shoppers who bail out. We’ll stay on Hold for now but are looking for a lower-risk entry point for new buyers. HOLD.
Tesla (TSLA 341) has resumed its uptrend in recent days, bursting above resistance in the 325 area yesterday and continuing higher today. After a strong few days, some wiggles are certainly possible, but the recent strength comes on the heels of the stock’s breakout of a two-and-a-half year consolidation, and ahead of the initial ramp in production of the Model 3. We’ll follow our plan and buy the second half of our position. BUY ANOTHER HALF.
We think Universal Display’s (OLED 113) recent action is excellent—the stock has shown no willingness to go down despite its huge earnings gap earlier this month. That can always change, but so far, the evidence is bullish, and all signs point toward booming demand for OLED’s materials and licenses going forward. BUY.
Veeva Systems (VEEV 64) reported another fine quarter last Thursday evening, with sales rising 32%, earnings up 47%, cash flow surging and management bumping up estimates going forward. The stock exploded higher on the news, capping a big three-week run that drove the stock up 25% in total. Since then, we have seen some above-average selling pressure, and the weekly chart has a few climax-like yellow flags. Even so, the trend is strongly up, business is excellent and the company has a very long (and, increasingly, reliable) runway of growth as its CRM and content management software platforms penetrate life sciences and other industries. If you own some, hold on; if you don’t, try to buy on dips of a couple of points. BUY.
XPO Logistics (XPO 53) continues to mark time just south of all-time highs. If we see a better opportunity emerge, it’s possible we could book our modest profit here and move on, given the stock’s mostly sideways action in recent months. But right now, we’re content to sit tight because the story is big and the path of least resistance is up. HOLD.
Watch List
PayPal (PYPL 52): PYPL continues to act well off its late-April earnings gap. The next pullback of a few percent will probably be buyable.
ServiceNow (NOW 105): NOW is a stock we’ve watched (and owned) a couple of times in recent years with mixed success. But now, bolstered by consistent, rapid growth, the stock is in a persistent uptrend, and like PYPL, the next dip should be buyable.
Zillow (Z 44): Z remains in good shape, consolidating normally after a sharp upmove to new highs before and after earnings. The story remains big.
