Going further above 3,000 today is close enough for “Government Work”
Draghi restarting QE, cut rates 0.10%, and from what I understand, further cuts are possible. This was more of a muted response than what I expected, yet the futures are up higher on that news. The market momentum is clearly to the upside. The bears are falling away. Just two weeks ago, I felt like a lone voice in the wilderness that there was no recession and that the market is going back to old highs, and even higher to 3,038 (was my guesstimate). We have China and Trump making nice, and a “dreadnaught” consumer holding up our economy. With the futures this morning, we are now less than 20 points from our previous high.
My concern now is that we are going to rush higher going into the Fed meeting and Powell is expected to lower rates. I expect the cut to go through, but the market is expecting a series of cuts. Recently Powell exhibited the ability to finesse the communication and soothe market participants. We also have the subsequent and initial trade meeting between China and the US later this month. These two occasions offer the opportunity for disappointment, and when the market is getting over its skis as it were, it’s concerning. Why do I say melt-up? Being a long-time market observer, I can’t help but notice how the market surges into the close recently. It has been happening in the last several days. While this is very bullish, the frequency is starting to cause alarm. I don’t like the seemingly mechanical nature, especially yesterday when the indexes nearly doubled in gains less than an hour before the close. Are the robots now programmed to buy the close? Are the momentum traders taking higher highs for granted? This is all very intoxicating, but it usually ends in tears. Why?
The market adheres to a pattern until everyone starts paying attention to it
Right now the pattern is the market hits a new high and then promptly retreats from it. So far, it’s possible that market participants haven’t caught on to this pattern as yet. This rally is so roundly hated that interim levels are shorted way before the upside. I am specifically addressing the move above 2,900; it was met with such skepticism that several levels above 2,900 were shorted until we vaulted above all the congestion at 2,950. We are now past short-covering and going into a momentum phase. In a “melt up,” momentum is taken to a point where there is panic buying, instead of panic selling. If the market holds this higher level and we get past the Fed meeting, I am concerned that this could happen. Obviously it’s great that we are going at the highs again, but remember back to January 1, 2018, where everyone was a bull and not a bear in sight? How many traders were hurt in the sell-off thereafter? A LOT.
I’ve said this before, please start trimming/hedging now while the market is going up
Call me a bore, but you will thank me later. If you are a trader/speculator, sell 3% to 5% of your winning positions. If you have older trades that have not worked and you are holding on to them because you don’t like taking losses, sell 3-4 shares. Once you start selling, it will be easier to look at losers rationally. If the market sells off (and it will), you can always buy them back lower. This is not for investment accounts, and especially interest-bearing stocks, period. Also not for stocks that you have as longer speculations and are still accumulating. Cash is the cheapest hedge. This morning the VIX has dropped into the 14s. I expect them to continue to slide. Once we see a 13 handle, we can talk about hedging using the VIX, SPY, QQQ and others. This is not an appeal to sell indiscriminately; the opposite. Slowly tail out collecting your gains. Once you hit 25% to 35%, you should maintain it, even as the market breaks into new highs, and even seemingly stays there. Now let’s talk stocks…
Barron’s confirms three of my calls…
Boeing (BA) “Boeing Stock Is Up Because CEO Sees ‘Solid Progress’ on Approvals for Grounded Jet”. Barron’s even confirms my conjecture that the FAA will approve the 737 Max ahead of the European aviation authority. Domestic airlines will be flying the Max before the end of this year. Perhaps they won’t be able to get the newly delivered planes in their schedule, but that is on them. BA has clearly broken out and will continue to rise until the news is official. Then there might be a bit of a sell-off, BA may hit 400 before that. I called BA a buy (again) at 320, recommended a call spread, and then went for a roll-up and out. I am a BA bull. Even if you bought at my initial buy at 350, you should be happy.
CenturyLink (CTL) Barron’s says CTL is soaring. I admit that I started recommending CTL at a higher price, but it does have a juicy dividend. It qualifies as a long-term investment albeit risky. Barron’s points to beneficial refinancing and some good tech acquisitions for growth. It completely misses my whole thesis; that CTL is a back-door 5G play. As such it has many years to play out. CTL offers the fiber capacity to carry the deluge of 5G data that is coming. The service CTL is going to offer (in spades) is called “backhaul”. This is where the cell tower receives the 5G data and then sends it through fiber-optic cable to the cloud. AT&T (T) and Verizon (VZ) are building out their infrastructure, and maybe T-Mobile (TMUS) and Sprint (S) are doing similar, but they aren’t going to cover all the capacity, especially not in the next five years. Also, there will be all kinds of IoT and fixed wireless capacity for 5G that will explode data. Look at Ciena (CIEN), it is reporting greater sales, and its equipment goes into these kinds of communication networks. CIEN got an upgrade (see below). While I think it will do well, I am not recommending it right now. I want to reiterate CTL as a long-term buy (dividend is safe), and a speculation for the medium-term as I believe there will be more positive talk about CTL.
Netflix (NFLX): Barron’s quotes an analyst “Apple TV+ Is ‘No Substitute’ for Netflix” in “What’s new”. Bank of America Merrill Lynch analyst Nat Schindler reiterated his Buy rating for Netflix stock on Tuesday, playing down the competitive threat from Apple.” While they address the Apple (AAPL) threat, they don’t address NFLX Vs. Disney (DIS). I believe and have said before this is not a zero-sum game for NFLX/DIS. To me, NFLX is the incumbent and DIS is not even on the field as yet, not really. I say buy NFLX along with the other FANG names.
Finally, I want to highlight a tiny med-tech name. So small that you can just buy 200-300 shares and forget about it. That name..drumroll…is TransEnterix, Inc. (TRXC). This is a tiny $0.73 stock that is in the robotics space. It doesn’t sell a lot of equipment and its sales are very lumpy, so it has been punished again and again. Yes, this is a name that might go bankrupt, so if you buy 200 shares and you lose $140, no biggie. Also, it announced a secondary offering so keep that in mind. TRXC has drawn an Innovations of the Year award from the Society of Laparoendoscopic Surgeons for its Senhance Microlaparoscopy 3 mm instruments. The Senhance System is the first robotic platform using 3 mm instrumentation, the company says, and it provides performance similar to 5 mm instruments with the benefit of robotic precision, advanced control, and a digital interface.
The resulting smaller ports may lead to virtually scarless procedures. TRXC first caught my attention for its specialized spinal surgery application and also have my eye out for robotic type med-tech. I have already spent too much time on this tiny, risky stock. Hey, I’m a geek at heart.
Tesla (TSLA): I have been meaning to comment on TSLA, and I called getting back into TSLA as a trade about 10 trading days ago between 220 and 230. It hit 250 today and it is going higher, maybe back to 320 (prior resistance). Look at the chart.
This is a classic “Cup and Handle” formation. This is one of the most bullish formations you can have. When I recommended TSLA recently, it was right when China gave TSLA a tax break on imported cars. I believe it got this consideration because TSLA will be manufacturing cars a lot sooner than anyone believes. I think Musk is going to start with “knock-down” sets to start. The chart is sniffing out some new news; that is what I see.
Micron Technology (NASDAQ:MU) was upgraded by analysts at Longbow Research from a “neutral” rating to a “buy” rating. They now have a $66.00 price target on the stock. 30.0% upside.
Micron Technology had its price target raised by analysts at Wells Fargo & Co. from $50.00 to $60.00. They now have an “outperform” rating on the stock. 18.2% upside.
My Take: I reiterated a buy on MU just a few weeks ago when it was $44. This analyst upgrade is good confirmation that MU has more room to go now that others are jumping on the bandwagon.
Ciena (CIEN) is now covered by analysts at Evercore ISI. They set an “outperform” rating and a $48.00 price target on the stock. 20.8% upside.
My Take: CIEN caters to the fiber communications space. Growth in CIEN means greater investment in long haul and “backhaul” communications. This is another piece of evidence that 5G is going to create demand-pull in communication services companies like CTL (see above).
Cloudera (CLDR): Carl Icahn buys $2.2 million shares.
My Take: Icahn bought into CLDR back in the beginning of August. At the time, I failed to get aggressive with CLDR. I did get behind CLDR after it reported great earnings and revenue growth. Here we see that Carl is buying more. I want to remind again you that CLDR is a great buy. Carl put two operatives on the board. Carl tends to push for a sale of the company; it could happen here.
At Home Group (HOME): Five Insiders bought $1,360,869.18 worth of shares
My Take: HOME share price crashed back in June losing 50% in one day. HOME is now a single-digit stock. The company has announced that it has “discovered” a new strategy – e-commerce – and will embrace that. The sarcasm is mine. In the meantime Wayfair (NYSE:W) and Amazon (NASDAQ:AMZN), and maybe regional brands like Bob’s Discount Furniture seem to be more aggressive in advertising if not online sales. Still, this number of insiders buying and the amount demands that I note it. I am not an expert in furniture sales (and don’t want to become one), and so I won’t opine.
Prudential Financial (PRU): Three insiders including the CFO and CEO bought about $1.1 million in shares. When I see the CFO buying in, I take notice. I want to take this opportunity to look at the insurance sector and perhaps PRU in particular. My thought was falling interest rates hurts Insurance because the fixed income investments generate less profit on the premium revenue. Am I missing something?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.