Some leading stocks are perking up.
It is very hard to balance one’s own investment opinions with one’s investment decisions. Sometimes things get so out of whack that the decision to sell is easy to make. That was the case this past January when stocks were extended beyond credulity. Other times it is not so easy, as has been the case since stocks sold off and consolidated the past several months. Sometimes the news background is so scary that it pays to wait for the air to clear as has been the case several times during the recent stock market sell off.
Recently, things appear to be getting a bit better. That is not to say that the long term problems that I have written about in several articles have gone away. Rather, it is to say that the short term fears of Armageddon have eased. Just to play devil’s advocate, here are some bullish, glass is half full, arguments to consider:
1 – North Korea – I don’t know how the North Korean talks will progress, but at least both sides are talking. My gut tells me that the North Korean talks can be productive, but I am extremely weary. Nonetheless, the talks will probably buy time for stocks.
2 – Trade Wars – are a real problem exacerbated by Donald Trump. We should not be fighting with our allies in Europe (EU), the Trans Pacific Partnership (TPP) or NAFTA. That is just plain stupid geopolitics. Saving a few pennies to cynically garner some populist votes, while losing significant trading and geopolitical partners may be the dumbest foreign policy move since our last three presidents screwed up the world. This could escalate into a long term problem for stocks. Any short term trade fixes will be good news for stocks.
The China trade war issue is a legitimate issue which will take much time to resolve. At least both sides are talking. I have no illusions that things will work out without some fireworks or some nonsensical headlines about a breakthrough. All I know is that the markets acted OK while China was screwing us for decades. Therefore, as long as all hell does not breakout, the markets may react positively to the China trade talks. In the long run we are probably ill prepared to deal with this issue. China will most likely yes us to death and stall.
3 – The Federal Reserve – is still walking a tight rope by moderate tightening monetary policy. As long as the Fed can get away with giving the economy just enough room to keep growing, the stock market may go along with quantitative tightening. Plus, the Fed is acutely aware of the flattening yield curve and has indicated its commitment to avoid an inverted yield curve.
4 – Black Swan Events – are a constant fear in today’s world. Any one of the following and more could harm stocks. But the stock market was strong all along while these regional powers were stirring up trouble.
-Russia is in financial trouble with a leader who needs to stir up trouble in order to keep his tyrannical regime in power.
-Iran is stirring up trouble all over the Middle East but the USA appears to be tightening the noose around the regime.
-Turkey is more evidence of a strong tyrant abusing his power and stirring up trouble.
Most stocks are still ensconced in a trading range.
Although small cap stocks, as represented by the Russell 2000, have made marginal new highs, the vast majority of stocks, as represented by the Dow Jones Industrial Average and S&P 500, are stuck in a trading range. Nonetheless, some leading stocks have broken to new highs.
As a consequence, I have purchased four leading stocks:
1 – Abiomed has been an outright home run, having run from $300 to $400 in no time flat.
2 – Adobe is an earnings growth machine that made new highs a while ago.
3 – GW Pharmaceuticals has broken out ahead of FDA approval of Epidiolex.
4 – Netflix broke out to new highs last week.
Many leading stocks look ready to run.
With the major indexes still in a stage 3 trading range, I may have some decisions to make. Here is a list of some stocks on my watch list that may be ready to pop. I do not want to overplay my hand, but do not want to miss out on positive price action. Perhaps breakouts by these stocks will pull the entire market up. Maybe there will just be a narrow bull market in some leading growth stocks:
1 – Ali Baba – BABA is growing by leaps and bounds and just spun off some of its medical related businesses for a hefty profit. BABA is close to breaking out.
2 – Amazon – AMZN is setting up for the next leg up.
3- Boeing – BA has just tested its old highs. It’s only a matter of time until BA pops.
4 – Salesforce – CRM 95 EPS is the world’s premier sales tool for businesses. A great company with a great leader.
5 – Baozun – BZUN 97 EPS is the Chinese version of CRM.
6 – Heico – HEI is the fastest growing defense stock.
7 – Mastercard – MA – 95 EPS recently made an all-time high it’s the Best in breed along with PayPal.
8 – Microsoft – MSFT is a steadily growing monopoly.
9 – Nvidia – NVDA – 99 EPS
10 – Palo Alto Networks – PANW 98 EPS
11 – Servicenow – NOW 98 EPS
12 – Ultimate Software – ULTI – 97 EPS
There are many stocks that are in very good shape in terms of great earnings growth and superior chart setups. If these stocks start to run, I will not fight the tape. The question for me will be how much capital to commit to stocks. The more stocks that run, the more I will buy. The better all stocks behave, the longer my asset allocation will be. If the general stock market does not follow, it will hold my purchases back.
The bottom line is to not be stubborn. On the one hand I will follow the tape action of leading stocks if they start to run. On the other hand, I will be very deliberative and not get stock crazy unless all major averages break out. I will also protect all of my positions with trailing stop losses.
Stocks are by no means out of the woods. All I am doing is gaming the stock market in case things become bullish. If the situation turns bearish, nothing ventured nothing lost. And the stop loss points on my four longs will protect me. The stock market, the economy and geopolitics are constantly evolving. It is my job to evaluate potential risk and reward at any given point in time. Stocks have evolved since January in terms of declining prices and time in jail, if you will.