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Was Last Week the Turning Point?

April 24, 2018, 11:57 am

I believe last week will go down as an important turning point for investors who’ve felt trapped in the tug-of-war around trade policy, interest rates and the future of the mega-cap tech stocks that Wall Street bulls depend on to lead the charge. Despite the broader market finishing in the red today, the S&P 500 is still up 1.3% since last Friday’s close. More importantly, the market as a whole is back in positive territory for the year. Through months of elevated volatility and sometimes stunning 9%-12% downswings, investors have made money in the past 16 weeks. There’s still a lot of ground left to recover, but the floor now looks in place.

Earnings growth is the engine that drives the rising cycle through the distractions and occasional storms. Four months ago, the market was in the early stages of what turned into the brightest earnings season since 2011 and Wall Street was ramping up fast. Investors were willing to pay 18.4X 2018 EPS estimates because after years of relative stagnation the prospect of 18% growth was too good to pass up. Over the next few weeks, the S&P surged 8% from levels slightly below where the Dow trades now, only to watch external risk factors take that profit away. Long-term interest rates looked precarious, talk from Washington about trade tariffs prompted retaliation from China, Europe and other key economic partners and Facebook (FB) and Amazon (AMZN) got caught in the rumor mill. All of these crosscurrents brought the bulls to a grinding halt.

But at the end of the day, rumors come and go and numbers paint the real picture. The same stocks that investors bought at 18.4X earnings are now trading at a multiple of 16.4X, which is a substantial discount to what the market will tolerate as long as earnings are improving fast enough to bridge the gap in a reasonable amount of time. Between tax cuts and a strong economy, that growth curve signals that even the high multiples from the beginning of the year may actually be a little cheap compared to the amount of cash these companies will generate in the next six to 12 months. That means that either the bulls have a lot of room to run or stocks will get even cheaper quarter to quarter. Multiples are not going to get much lower before institutional investors come in to capture the discounts, leaving us with a bull run in the end after all.

Given this, I remain confident that the S&P will at least hit 3,000 by year-end and the Dow will close at 29,000 or 30,000. This isn’t based on wishful thinking. It’s just where a conservative reading of the numbers points us. The cycle is still in the early stages, with barely 10% of stocks on record with their performance for the trailing quarter. But as the results accumulate, I think Wall Street will be quite pleased.

Gauging the Greed Index

April 17, 2018, 12:49 pm

While Wall Street likes to use the volatility index (VIX) as a fear gauge, the truth is that stocks can make big moves to the upside when they become too compelling for traders on the sidelines to ignore. Under those circumstances, the VIX can also be a “greed” gauge, and I think we’re entering one of those cycles now.

At worst, the broader market looked reasonably priced at the end of the first quarter, and while the S&P 500 has come down 5% from its March low it’s still a long way from bubble territory. Investors have proved over and over again that they’re happy to buy the market at 18X 2018 EPS estimates when the VIX swings to greed, and down here at 16X it’s hard to argue that valuations alone justify fear.

Remember, a tax windfall on top of already-robust economic conditions has doubled 2018 earnings growth expectations, so stocks are more attractive than they were six months ago. Back in November, investors bought what they thought would be 9%-10% growth at 18X earnings. That was enough to support the S&P at well above 2,500, so there’s a reason for a little greed with growth tracking at 18%-19% in the current quarter and stocks trading at 16X earnings.

What’s important for us is that the fundamental ground underneath the elevated day-to-day volatility has subtly turned into our friend. The S&P closed up last week, reversing all losses for the month to date and actually posting a gain since the quarter closed.

That said, we’re still navigating the most volatile market in years. As money rotates in search of clear leadership, winning sectors and themes come and go, leaving many stocks swinging in zero-sum circles. That’s why the market as a whole can feel stuck from week to week, but our charts help us keep an eye on the larger patterns and trends behind the grind.

You can see this across the market, too. Volatility has been intense this month – big moves above 1% in either direction are three times more prevalent than normal – but with two out of three of those big moves pointing up, the S&P is reaching back to the record heights investors abandoned during the selling in February.

Looking forward, earnings season will reveal the winners and losers for the coming quarter, so the best way to make money will be to capture the strongest charts that emerge and steer clear of dead money.

Risk On, Risk Off

April 10, 2018, 10:44 am

Wall Street started the second quarter much the same way it ended the first. Investors came back from the holiday break in a wary frame of mind, and while the mood brightened considerably, we had a ways to go before investors could get past the headlines. That triggered a lot of volatility, so I thought now would be a good time to talk about what set the selling off.

Last Monday, the market was down on a variety of factors, including a soft ISM number, news that China is imposing tariffs on 128 U.S. products and President Trump’s continued tweeting onslaught on Amazon (AMZN), which knocked the stock another 5% and dragged the NASDAQ down along with it.

We also saw another round of rotation from Big Tech back to more defensive themes: consumer staples, real estate, utilities and Treasury debt. These areas are still battered on a year-to-date basis, so headlines around the FAANG group – Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet (GOOGL) – and similar Big Tech giants are largely an excuse to capture some of that exposed data.

Last Friday’s selling started overnight on news that President Trump wants to add another $100 billion in Chinese imports to the tariff list, and it accelerated when Federal Reserve Chairman Jerome Powell failed to tell markets what they wanted to hear about interest rates in the wake of a fairly cool monthly employment report.

Even after three big up days in the middle, Friday’s retreat left the S&P 500 back within sight of Monday’s low and down 1% from the previous Thursday’s pre-holiday close. Losing 1% in a week is relatively small – and not even half the loss investors faced on Monday – and the biggest red numbers have been concentrated in a handful of companies. At one point, the biggest drags on the market were actually showing a net weekly gain, which illustrates both how fast the pendulum can swing and the current tension between gloomy headlines and the strongest corporate fundamentals in years.

Earnings will be important going forward. They are on track to grow 18%-19% above last year’s levels, and with revenue likely to climb 6%-7% as well, the biggest U.S. corporations have plenty of room on the top line to clear any new trade policy hurdles. Moreover, stocks look cheaper relative to those anticipated earnings now than they did a year ago.

Those fundamentals haven’t gotten any worse since the S&P 500 peaked back in January. Expectations have actually brightened by a wide margin, and I suspect that once earnings season picks up speed late next week, Wall Street will find it harder to sell stocks. In addition to the growth, valuations have gotten more attractive with the combination of lower stock prices and an earnings growth ramp. We’re now a long way from bubble conditions or even an overheated market.

This week’s earnings and news flow might give a lot of investors who stepped aside enough confidence to come back. That’s not to say the volatility will go away, but the strengthening economy and growing earnings will at some point make lower stock prices too attractive to pass up.

How to Allocate Your Investment Funds

April 3, 2018, 11:11 am

Some of the questions I get most often are related to allocation – how much money to put into your portfolio, how many stocks to own, how much to invest in each one and so on. These are important questions, so let me share a few thoughts as you get started.

First, there is no magic formula that applies to all of us. I know it would be easier if there were, but it’s important to remember that everybody’s situation is different. We all have different amounts of money we can invest. We all have different risk tolerances. We have different time frames for when we’ll need our money and different purposes for it — a mortgage down payment, college tuition, retirement, a vacation home, day-to-day needs and more. With that in mind, I’d like to offer some guidelines for you to consider as you build your own portfolio.

One very good rule of thumb is that you want to be more conservative with money you will need in the next few years. Most people, if they have a specific financial obligation coming up, can’t afford to lose the money they need to pay for it. It’s a good idea to keep this kind of money in cash or cash-like investments such as savings accounts, money market funds, CDs and some conservative bonds.

Another excellent rule of thumb is to try to diversify, which is a way of saying, “spread out your risk” and “don’t put all of your eggs in one basket.” Tempting as it is to bet big on a stock you really like, there is no danger greater than being too heavily weighted in one investment.

My general advice is to put no more than 5% of your investable dollars into any one stock, as this will help spread out your risk. From there, I would love to see you own at least four or five stocks, but I understand many investors need to start with fewer than that and build over time.

Most important of all, I always encourage you to invest in a way that makes you most comfortable. Ideally, you’ll be able to consistently reinvest your profits, which unlocks the magic of compounding, a simple but extremely powerful concept. Your money keeps earning money, which in turn earns more money.

I’m sure many of you have seen this in action, especially with earned interest. If your savings account earns 3% interest on $100, that initial amount becomes $103 in a year’s time. That $103 earns 3% the next year to move up to $106.10. So both your interest and principal are earning interest.

Compounding works the same way with trading. It can be an effective way to turn even a modest investment into a real and life-changing sum. Taking those quick gains and rolling them back into the next trade gives you the potential to make solid profits and truly build your wealth over time.

Brushing Off the Winter Chill

March 27, 2018, 10:34 am

With parts of the country still digging out from their fourth winter storm in as many weeks, it’s starting to look like March came in like a lion – full of bluster and volatility – and will leave the same way. The stock market looks very similar. We got a little relief early on from February’s volatility, but the last few days have put the broad market back on the rollercoaster.

The S&P 500 lost 6% last week, relapsing to within sight of correction territory. The blue-chip Dow industrials were once again down 10% from their peak, and the controversy over the role Facebook (FB) data played in the 2016 election helped push the once-ebullient NASDAQ down 8% from its more recent record.

A full 93% of all mid-cap and larger stocks were taken into the rest on Friday. Even a lot of the classically defensive themes like consumer products and medical supply companies felt the heat. Hints of a trade war on the horizon weren’t kind to the global exporters like Caterpillar (CAT) and Boeing (BA). Add Facebook’s woes to an overbought Big Tech universe and the NASDAQ was in no condition to maintain leadership.

No investor wants these kinds of weeks, but they do happen, and we went through it all not long ago. We saw then that when the selling gets this indiscriminate, bargain hunters emerge to pick up stocks at a discount and get strong charts moving again. I expect that to happen this time as well, especially with the approaching earnings season on track to be very strong.

These are the times when you don’t want to overreact, and I suspect more than a few investors did as they forgot the lessons from February. There may be some lingering effects from what we’ve seen in the last week, which included a month’s worth of up-or-down 1%-3% sessions packed. In the grand scheme of things, this is actually what healthy volatility feels like. Electronic circuit breakers don’t even start kicking in until the S&P 500 falls close to three times as far as it did on Thursday.

The S&P 500 successfully holding its 200-day moving average on Friday and reports over the weekend that the United States and China are willing to negotiate tariffs and trade imbalances to avert a trade war alleviated concerns and brought the bulls back out in the force. Any additional positive news and anticipation of big earnings expectations should help stocks get back to firing on all cylinders.

Is There Retail After Amazon (AMZN)?

March 20, 2018, 10:27 am

There’s no denying that online shopping has changed the world. Amazon (AMZN) is usually the first to come to mind, as it has disrupted everyday life category by category. But with AMZN already having grown into a $700 billion behemoth – now the second-biggest U.S. stock behind only Apple (AAPL) – it forces investors to either hold the established giant or hunt the next generation of disruptors on the horizon.

If the company keeps conquering retail categories, revenue can ramp well beyond current levels. U.S. grocery alone could one day become a $1 trillion opportunity for investors, with even a 10% share of that vast space giving the stock price enough juice to ride another 50%. Then there’s freight, logistics, inventory management, business intelligence and domination of the computing cloud that keeps smaller entities feeding into the Amazon universe.

Here’s where it gets a little tricky, though. AMZN is too overpriced right now and the smaller companies are still too small to invest in. The usual story moves straight from start-up to acquisition, without ever passing through the public offering stage, and as long as AMZN has competitors there will always be legacy retailers willing to pay cash for a hot website and new ideas.

At this stage, a lot of the sizzle driving old-school retail stocks like Walmart (WMT) is all about these infusions of outside innovation keeping them relatively relevant. It’s still a horse race whether conventional brick-and-mortar chains will learn from AMZN fast enough to survive, and that’s why the stocks are still in play. Mall retail learned from the collapse of bookstores and media chains.

Realistically speaking, all retail is hybrid retail now, with every brick-and-mortar purchasing decision at least informed by the presence (or absence) of online alternatives and vice versa. AMZN is coming offline into grocery stores and physical Amazon Go locations. Brick-and-mortar is pushing floor traffic to the site for payment and delivery.

That’s a good thing because pure online retail stocks are so scarce. We’re a long way from the e-commerce gold rush of 1999-2000, when hundreds of “web stores” emerged and only a few like AMZN itself survived as standalone entities we can trade. This is why I don’t think it’s worth getting hung up thinking of niche categories – AMZN or some other giant will ultimately find a way to hone in on attractive opportunities. Instead, I believe it’s best to focus on new delivery models and new ways to manage commercial relationships.

Otherwise, we’re stuck in a universe dominated by Wayfair (W) in home furnishings, tiny Gaia (GAIA) in yoga supplies and assorted overseas Amazon-like marketplaces like Mercado Libre (MELI) in Latin America or Vipshops (VIPS) and Alibaba (BABA) in China.

However, those new relationships are a little more interesting. Remember, AMZN is really just a high-tech update on old-fashioned catalog retail. Stocks like Lands End (LE) are the last survivors of the catalog universe, but its persistence is a good reminder that the store as we know it isn’t a universal or necessary way to structure sales. (OSTK) is leading the way into blockchain-driven systems; Etsy (ETSY) and eBay (EBAY) blur the line between buyer and seller. I also wouldn’t rule out subscription retail models like Blue Apron (APRN).

These could turn into good opportunities down the road, so I think they’re worth keeping an eye on now.

The “Best of Breed” Stocks

March 13, 2018, 2:22 pm

Now is a great time to be invested in the stock market, but it’s also not a bad idea to have cash on the sidelines so you can deploy your money and trade the volatility. When buying the dips and putting that cash to work, you want to focus on the “best of breed” stocks, as these are the companies that will do well over the long term, and stay away from the weaker areas of the market.

Watch my CNBC video below to find out which sectors and stocks I believe are worth investing in, as well as those you should stay away from.

[ Click here to play message from Hilary Kramer ]

Can Volatility Be Good For Traders?

March 6, 2018, 10:29 am

Remember when the market’s only direction seemed to be up? We were spoiled by months without the S&P 500 moving more than 1% between open and close, the way it used to be about once a week on average. Now volatility is back with a vengeance. We’ve endured 20 volatile days in a row as stocks try to make up for lost time.

Last week’s turn on the rollercoaster ended with the S&P 500 down 3.2%. My Absolute Capital Return positions fared much better thanks to our high-tech heavyweights Nutanix (NTNX) and Xilinx (XLNX). We locked in gains in XLNX on Tuesday and then NTNX this Monday.

The key to our long-term success is trades like XLNX: during the 15 market days we held it, our capital was moving at an annualized rate north of 170%, much faster than what the S&P can provide in anything but the shortest spurts. Amass enough of those quick hits together and you have the perfect recipe for beating the market over time.

Keeping our holding periods tight also works in our favor when the markets are unsettled and we need to take advantage of the fleeting swings without getting stuck when the tides turn. We stick with the stocks that move and cut the ones that go in the wrong direction even if the underlying fundamentals are solid. I want to keep our money working for us, so we’ll rotate our money into other names and circle back once the fundamentals and chart are lined up again.

A lot of the noise in the market tends to revolve around long-term scenarios that only those with a crystal ball would be able to predict accurately. We saw plenty of that last week when the broader indices went spinning after Federal Reserve Chair Jerome Powell left the door open for a potential fourth rate hike. Things took an even uglier turn after President Trump dropped the trade bomb, triggering fears of a trade war and raising the odds that the global economy is headed into unknown territory. Wall Street doesn’t like sudden shocks because one shudder in the here and now can throw off positions meant to pay off down the road.

Here’s the thing, though. Volatility is good for traders. A sudden upside move unlocks substantial value all at once, reaping double-digit profits in weeks instead of years. And as long as we stay liquid, sudden moves to the downside widen our trading universe as we find more attractive entries on stocks that would have been otherwise off limits.

There’s always a rally somewhere, and by staying disciplined and sticking with our trend trading strategy, we remain open to the market’s ability to pay out under a wide range of conditions. We can invest across sectors, themes and even international markets, and we can also selectively short the weaker sides of the market when the right opportunity arises.

We’ve locked in four double-digit winners since February 20, and I expect the gains to keep coming as we continue trading the best stocks. Make sure to sign up for your risk-free trial of Absolute Capital Return so you can be ready for profits before my next Buy Alert triggers.

My Latest Take On the Market

February 27, 2018, 10:48 am

Stocks have felt some pressure over these past few weeks, due in large part to the rise in the 10-year Treasury yield. It’s been a slow but steady climb in yields since September, and while some of the rise was for good reason – a stronger economy and higher demand for money – some of it was also negative as the supply of bonds is increasing with rising government budget deficits. This is poor timing with the Federal Reserve beginning to withdraw support that has been crucial in keeping a lid on rates as the economy recovered.

We will hear from the new Fed Chair Jerome Powell during his congressional testimony this week. He’s not likely to change plans to raise rates three times this year, but Wall Street will be looking for clues on Powell’s philosophy. I expect Congress to question his statements from 2012 when he was critical of quantitative easing (QE) due to concerns that bubbles were being created in financial assets. If he walks back some of these statements and indicates that market conditions could be a part of the Fed’s consideration when raising rates, Wall Street may finally relax and trigger a market rally. If Powell chooses to stand by his previous views, we could see another sell-off.

Outside of the Fed, we’ll also get the typical beginning-of-the-month economic data, including auto sales, global PMI reports and the February jobs number. Even though Wall Street is more concerned with rates, I don’t think we’re in an environment where bad news is good news. Some analysts, including famed hedge fund manager Ray Dalio, are expressing concerns over a slowing economy. While it is possible we’ll see the overall growth rate stall a bit, it will still be solid. This would put us in a welcomed “Goldilocks” market environment, which should also support stocks.

SP 500 Chart

Given these factors, the next two weeks will be critical for stocks. As you can see in the chart above, the S&P 500 has good support at 2,690 and 2,650, which I expect to hold for now. I do not anticipate a test of the lows of two weeks ago in the near term, but last Wednesday’s high of 2,747 could turn into resistance.

This is a bit of a tricky environment, but keeping a focus on quality stocks with a good mix of technicals and fundamentals should help you do well regardless of where the market turns next.

From Buzz to Business: Biotech

February 21, 2018, 11:43 am

It’s been an especially wild ride for biotech recently, but I’m glad to see that the industry that embodies so much sizzle is bouncing back fast. The iShares Nasdaq Biotechnology ETF (IBB) still has to move quite a bit to recover its pre-correction peak, but the rebound path could close the gap fast.

While these stocks have outperformed the broad market since the presidential election, they also suffered steeper losses in the 2015-2016 debate over the sky-high cost of drug prices. Unlike the major indices nudging records on a monthly basis, biotech has another 20% to rally before it even tests the historical limit. As such, many of the development-stage companies that capture truly disruptive growth are becoming attractive opportunities.

Alexion Pharmaceuticals (ALXN), GW Pharmaceuticals (GWPH), Denali Pharmaceuticals (DNLI) and Portola Pharmaceuticals (PTLA) are great examples of the types of companies I’m talking about. Let me explain why.

ALXN is tracking to double its cash flow by 2021, which really isn’t far away in the grand scheme of things. This one’s all about continuing to supplement a strong existing autoimmune franchise with next-generation products – drugs that address minuscule patient populations but make a huge difference to those suffering from one genetic disorder after another. While these programs won’t be blockbusters, they all draw on a few core technologies, which makes it easier to roll from target to target and build a significant market.

GWPH will launch a huge blockbuster drug in the next couple of months that would be huge for the stock if it’s a success. As Wall Street evaluates the revenue prospects, the clock is ticking toward that once-in-a-lifetime corporate event. Meanwhile, the pipeline keeps advancing on other targets, including an adult epilepsy program with strong potential. GWPH is a great demonstration of why biotech has such appeal among long-term investors. You’re literally watching these companies change lives, year by year and milestone by milestone, and the base is usually set close enough to zero that when the fundamental needle starts moving, it moves fast.

DNLI only went public in December so it’s still on the speculative side. I’d like it to get a little trading history behind it and wait for management to share more about the development pipeline. We’re looking at neurodegenerative disease here, which is an extremely challenging field to crack. If the company can survive the clinical process and convince the FDA that it can cure Alzheimer’s or Parkinson’s disease, DNLI’s upside could be huge. Otherwise, there’s a non-trivial risk that, like endless other ambitious researchers before it, the company will go bust.

PTLA has given up 30% from last summer’s peak after the FDA hit the brakes on approving a hotly-anticipated blood disease therapy upon discovering a high rate of side effects. Management is working around the roadblock and I suspect this could still become a billion-dollar drug under the right circumstances. However, those circumstances haven’t come together yet so it will remain on my watch list for now.

I’m keeping a close eye on my screens, but right now I think the best opportunities lie within ALXN and GWPH, which I recommended in my GameChangers service. I expect these stocks to move fast, and if you’re interested in seeing the level I suggest buying them under and how far I think they can fly, make sure to sign up for your risk-free trial of GameChangers before it’s too late.