WHAT TO DO NOW: Remain bullish, but let stocks “pull” you into a fully invested position. The overall market is in good shape, with all three of our market timing indicators still bullish, though individual growth stocks still have a bit more to prove as we move through the heart of earnings season. We have no changes today (the Model Portfolio is 20% in cash), but are ready to move to a fully invested stance should earnings season go well.
Current Market Environment
Markets held their early gains, and all three of the major indexes finished the day at new all-time highs. The Fed kept interest rates steady and said it would begin running its balance sheet lower “relatively soon.” At the close, the Dow forged ahead by 97 points and the Nasdaq gained 11 points.
Looking at the overall market, the evidence remains encouraging as stocks are building on the rally that began earlier this month. We’re encouraged to see all five of the major indexes we track stretch away from their 50-day lines (keeping our Cabot Tides bullish), while the number of stocks hitting new lows has dried up nicely over the past several days, solidifying the Two-Second Indicator’s positive stance.
Throw in our still-positive Cabot Trend Lines and the numerous positive longer-term studies we’ve written about, and the odds continue to favor higher prices in the intermediate- and longer-term.
Individual stocks are also acting well, though we wouldn’t characterize it as full steam ahead. Most growth stocks are either still shy of their May/June highs, or, if they’ve hit new highs, they haven’t made a ton of progress above their prior highs. To be clear, that action isn’t bearish or unusual—after all, most growth stocks have only been pushing higher for a couple of weeks after a pretty sharp downturn in June. But we’d still like to see more upside to confirm this latest push higher.
We think the true tell will come during the next couple of weeks as earnings season unfolds. If earnings reports catapult more stocks to new highs, then it’s likely the summer rally will accelerate and we’ll look to get fully invested. If, however, earnings season is a dud, it will be a sign that the market probably needs more time to set up before resuming its longer-term advance.
Still, you know us—we prefer to go with the evidence in front of us and then react if it changes. Right now, most of the evidence is bullish, so we advise staying in a heavily invested position. We have no changes tonight, with the Model Portfolio carrying eight stocks (out of a possible 10) and a cash position around 20%.
Model Portfolio
Alibaba (BABA 156) stretched as high as 156 last week before taking a breather; it remains above its shorter-term 25-day line (near 146.5) and near-term support areas (145 or so). The company has had some minor news lately, including its entry into the supermarket business in China (which will double as online grocery delivery hubs) and rumors that it will take a stake in one of the largest online marketplaces in Indonesia. There’s no set date yet for the firm’s earnings release, but it’s probably coming in about two weeks. That’s always a risk in the short-term, but we remain optimistic BABA has a bright longer-term future. BUY.
Facebook (FB 166) looks great, having hit new highs on big volume as soon as the pressure came off the market and rising since. Like so many stocks, it will come down to earnings, which are due out tonight—analysts are expecting sales of $9.2 billion and earnings of $1.14 per share, but as always, a lot of attention will be paid to user growth, guidance on the conference call (including spending guidance) and any updates into the monetization of Instagram and forecasts for Messenger (the company said last week it would begin monetizing that platform), not to mention any tidbits on rumors that it will launch a subscription news service in the fall. FB has some room to pull back (the 50-day line is around 154) and still be OK, but we’ll see what comes. We’re staying on Buy but will be watching closely. BUY.
PayPal (PYPL 59) is in a position similar to FB. The stock was one of the first to leap to new highs when the market got going in early July, and it’s acted well since; the action and the firm’s long-term fundamental story (recent deals with JPMorgan and Visa continue to indicate competition is lessening) points to the stock being a liquid leader of the next leg up. But earnings are out tonight, which will be key; analysts are looking for nearly $3.1 billion in revenue and 43 cents per share of earnings, though we’re just as interested in the firm’s free cash flow totals (and outlook), which have repeatedly been larger than earnings in recent quarters. As with FB, we’ll stay on Buy as the stock acts great, but will adjust if need be following earnings. BUY.
ProShares Ultra S&P 500 Fund (SSO 93) hasn’t been dynamic, but it’s been rising during the past two weeks, notching a new high yesterday. The rotation we saw yesterday into some material and financial stocks could help the S&P 500 (and SSO) going forward. Regardless of how that plays out, though, the trend remains up, so we’ll stay on Buy. BUY.
Shopify (SHOP 94) has begun to tighten up a bit in the 90 to 96 area, though it’s still choppy on a day-to-day basis. All told, SHOP is sitting right in the middle of its two-month trading range, and its upmove this month has come on light volume. Neither of those are bearish, per se, but they don’t (yet) point to big demand. At this point, we’re in longer-term trend-following mode, using a loose stop around the 30-week moving average (currently in the low- to mid-70s), so we’re not sweating every tick, but earnings, due out August 1, should move the stock one way or the other. HOLD.
Universal Display’s (OLED 123) has had a good-looking comeback during the past couple of weeks, rallying to within a few points of its old high (and nicely above the “shelf” it etched for much of May). Earnings are due out next Thursday, which could make or break the uptrend—we’ll have to see what comes, but we continue to see anecdotal evidence that the movement toward organic light emitting diode technology is unstoppable (I checked out a few OLED TVs this past weekend while I was at the mall; the picture quality is ridiculously good), which should benefit OLED. We’ll stay on Buy, but it’s best to keep new positions on the small side ahead of earnings next week. BUY.
Veeva Systems (VEEV 65) continues to sneak back toward its late-May high while riding its 50-day line higher, which is good to see. But volume has been light (the last up day on above-average volume was June 19) and the relative performance (RP) line is still mostly sideways. VEEV hasn’t done anything wrong, so we’re happy to hang on. Hold remains the appropriate rating. HOLD.
XPO Logistics (XPO 62) seems to be digesting its big share offering well, tightening up above its 50-day line (now near 59.5) and finding a few buyers recently as transportation stocks bounce. Nothing with the big story has changed here—CEO Bradley Jacobs continues to form a leading transportation and logistics company with huge and growing free cash flow—but near-term, earnings on August 3 (results were pre-announced, but the outlook will be key) and any acquisition (paid for by the share offering proceeds) will likely have an outsized impact on the stock. But just going with what we see, XPO remains in an uptrend with big cash flow growth expected, so we’ll stay on Buy. BUY.
Watch List
Carvana (CVNA 21): CVNA continues to consolidate nicely after a jaw-dropping rally in June. The stock remains extremely volatile (average move per day is greater than 5%) so if we buy, it will likely be just a half position.
Celgene (CELG 138): CELG reports earnings on Thursday morning, and if all goes well, it should continue its turnaround from its big 2015-2016 correction. Earnings are expected to grow 20%-plus annually for many years to come.
ServiceNow (NOW 109): NOW has suffered some selling, but what will count most is the reaction to earnings (due out tonight) in the days ahead. We still think NOW’s story is as good as any.
Wayfair (W 79): W is highly shorted and still losing money, but the stock has acted excellently in recent months and we see huge potential as more furniture and home goods purchases move online. Earnings are due August 8.
Workday (WDAY 105): WDAY is another cloud software stock that looks like an emerging blue chip, with tools that make big clients’ financials, human capital management and other processes simpler. Revenues have been growing at 30%-plus rates forever, and earnings and cash flow are now ramping. Earnings aren’t out until the tail end of August, and the stock is near the top of a big consolidation.
