*** The following is a complete copy of the raw text from Issue #295 of Nate’s Notes, which was published for subscribers on July 5th, 2019, and reflects our opinions of the market and all stocks mentioned as of that date. The full issue (which includes all of the tables and charts referenced in the text-only version below) can be downloaded as a .pdf by clicking the image to left. ***

We believe that according the name
“investors” to institutions that trade actively
is like calling someone who repeatedly
engages in one-night stands a “romantic.”

– Warren Buffett

Is It “Make-Or-Break” Time For The Market?

After spending virtually the entire month of May in a downtrend, the market then reversed course and spent the entire month of June in rally mode… and, as you can see in the performance numbers above, it is hard to find much to complain about when it comes to the returns we have seen so far this year (especially when we remember that we have been sleeping easily at night in exchange for not being fully invested in the Model Portfolio for quite some time now).

That being said, I want to remind you that while the sorts of year-to-date returns seen above are actually quite consistent with what we would expect to see in the late stages of a bull market (and there is nothing that says they can’t get even better before the party finally comes to an end), they are not sustainable over the long-haul (so be sure to keep your expectations in check when it comes to longer-term financial planning).

In addition, please also be careful about getting lulled into a false sense of security by the “easy money” that we’ve been making so far this year, as easy money is often followed by “easy tears” once the party finally comes to an end, and, as you will see below, though all five of the major indices I use to gauge the health of the overall market are currently trading solidly above their one eyebrow levels, I believe the market is reaching a critical juncture that my experiences suggest is going to lead to a very sizable move… but only time will tell which direction it will be heading once it gets underway.

On the bullish side of the coin, though the global economy is struggling on a number of fronts, our economy here at home is holding up much better than virtually all others, and while it remains to be seen whether the U.S. economy will be able to continue bucking the trend no matter how bad things get elsewhere, for now, this strength means that any capital fleeing other less robust economies around the world is likely to continue flowing into situations that are positioned to benefit from the strength of our economy.

In addition to the overall strength of our economy (and for better or worse), Jerome Powell and the rest of his team seem to be adopting a stance that suggests there is a “Fed put” in place that may help to keep a floor under the market… and, while such a stance certainly helps to boost investor confidence on a shorter-term basis (which is necessary to keep a bull market alive), I believe it is also worth noting that with so many variables currently trending in “uncharted territory,” successfully navigating the economic landscape ahead may prove be easier said than done (especially if the trade war ends up having an additional twist or two left in it before things are finally resolved – more on this below).

Finally, though I will need to see some additional follow through from the DJIA and Nasdaq before I can feel more comfortable about labeling the rally “the real deal,” it is hard to call a market that is hitting new highs anything but a bull market, and so, unless/until we get evidence that the current rally is, in fact, just a last gasp effort before the bull market fizzles out once and for all, we have to include the price action we are seeing as a bullish piece of evidence as well.

On the bearish side of the coin, however, I have to admit that the eye of the needle that all the players involved will need to collectively thread in the months and quarters ahead if the bull market is, in fact, going to charge higher seems to be growing more and more narrow as time goes by, and while the optimist in me is naturally hopeful that “everything will work out fine,” I think it is worth keeping the following thoughts in mind as things start to unfold in the weeks and months ahead.

First off, with regards to the trade situation, though it was obviously better that “good news” rather than “bad news” came out of the recent G-20 meeting, the fact of the matter is that all of the hurdles that got in the way the last time it appeared things were getting close to a resolution are still in the mix, and though the consensus seems to be that “it is in everyone’s best interest to get a deal done this time around, so they probably will”… and, unfortunately, this is the same consensus view that investors have had heading into all the other meetings that have taken place already (i.e. we need to be careful to not start counting our chickens until they’ve actually hatched!).

And, on a related note, I have to admit that I am somewhat concerned by the fact that the markets (and especially the chip stocks) are not moving higher in as convincing a manner as I would like to see if the outlook really was looking more rosy when it comes to international trade.

To be sure, it sometimes takes time for “catalysts” to finally make their presence felt in the market (and next week could bring a solid set of new highs across the board for many of the indices and “big name” stocks that tend to have an oversized influence on investor sentiment), but, at least at this very moment, I think we need to start thinking about the possibility that all of the good news may already be baked into the cake, so to speak… and, if this is the case, it means the old Wall Street adage “buy the rumor, sell the news” may come into play if/when a trade agreement is actually reached (i.e. the market may sell-off no matter how good the deal ends up being).

Of course, once one starts to consider this possibility that even good news on the trade war front may result in a market sell-off, it naturally leads to the more alarming question of what the market will do if a bad deal (or even no deal at all) is reached, especially when the possibility is stacked up against the current state of the global economy… and though the fact that a number of major indices are starting to push into new all-time high territory has to be counted as a bullish clue, if the rally ends up failing before new highs can be set with conviction, given where we are at in the cycle, I know that my personal experiences suggest that we will need to count it as a decidedly bearish turn of events.

No, charts cannot tell you with 100% certainty where a stock (or index) is headed next (only where it has been), but there are certain patterns that do show up over and over again once you have followed the market long enough, and, unfortunately, if the rally fails from here, a great many indices and stocks are going to start tracing out the sorts of “double (if not triple, or even quadruple!) top” chart patterns that, more often than not, have ended up marking the ends of major bull markets (and, by definition, the starts of new bear markets)… and, given where we are at in the current market cycle, history suggests that once a new bear market gets underway, it will likely “do a lot of damage in hurry.”

That being said, I think it is important to keep one of our favorite mantras in the newsletter in mind at this stage of the game, namely, “our job is to position our Portfolios based on what the market is actually doing, not on what we think (or are worried) it might do”… and since, as mentioned above, what the market is doing at this exact moment in time is “heading higher,” I am not making a whole lot of changes to the Portfolios as part of the monthly rebalancing that I do in every issue.

In particular, I am moving a bit of money into three of our recommended stocks that have the least amount of international exposure (namely, Catasys, Cleveland-Cliffs, and MannKind), and, in order to keep our cash position very close to unchanged in the Model Portfolio (and our margin debit likewise “about the same” in the Aggressive), I am selling small portions of several of our other positions in the biotech/healthcare space, along with a bit of our Apple position, to cover the cost of the purchases we are making this time around.

And, of course, I want to remind you that even though I am currently sitting on a cash position that represents roughly 17% of the Model Portfolio as part of allowing myself to sleep easily at night when it comes to the newsletter’s Portfolios, there is absolutely nothing wrong with you picking a different number for your own “sleeping point,” as it is far more important for you to maintain your own peace of mind in what is almost certainly going to become a more volatile market in the weeks and months ahead than it is to simply follow my lead (unless, of course, you have been with the newsletter long enough that simply following my lead is, in fact, what allows you to sleep easily at night – and, if this is the case, thanks again for your confidence in me and the long-term approach that I espouse in the newsletter!).

Finally, because I have been hearing from a number of new subscribers (as all as a few older ones who are feeling some of the same anxieties as the market has been grinding higher) who are excited to start investing in my ideas “but are scared to put money to work when the market is hitting new highs,” I want to encourage anyone who needs a little “pep talk” about taking a longer-term approach to investing to go back and read the March 2019 issue of the newsletter (which is still available in “bare bones” format on the same page of the website that the current issue came from).
Yes, with all that is going on in the world, it is hard to make sense of this market… but as long as one does their homework and takes a disciplined approach to building (or exiting) positions rather than blindly throwing money at stocks in hopes that they “pop” soon after being bought, the stock market is one of the easiest ways around to grow one’s wealth over the long-haul.

Thanks again for your interest in my ideas – here’s to hoping for plenty of good news to share when the August issue goes to press next month (and perhaps even in the Inter-Issue Commentary that will come out before then as well!). Cheers!

Top Picks (for new money this month)

All else being equal (i.e. you already own “pretty much everything” in the newsletter), my top picks for you this month are:

Catasys (CATS) – For all of the same reasons mentioned for the past several months, Catasys is once again a “Top Pick” for those of you looking to add to your position!

MannKind (MNKD) – With volume in the stock having dried up to virtually nothing (and optimism seeming to be in equally short supply these days), the stage is certainly set for the possibility of some fireworks if it turns out that Castagna is, in fact, in the final stages of delivering on this round of his game plan (and it will be interesting to see what – if anything – ends up happening once the Deerfield debt has finally been paid off).

Walt Disney (DIS) – Though the company clearly has a great deal of exposure to the global economy, Disney’s stock is continuing to trace out a very bullish chart pattern (and “strength often begets strength” when it comes to stock prices)!

Outstanding Orders

For the reasons discussed above and below, the Model (Aggressive) Portfolio will sell 25 (100) Apple, 100 (500) Celgene, 50 (100) Illumina, 300 (2,000) Luminex, and 555.2 (2,187.8) Tekla Life Sciences Investors and purchase 1,000 (2,500) Catasys, 500 (2,500) Cleveland-Cliffs, and 20,000 (100,000) MannKind. We will use the closing prices on Monday, July 8th, for all transactions.

Summary of Recommended Stocks

AdvisorShares Ranger Equity Bear ETF

Once again, shares of HDGE are “bouncing along the bottom” in concert with the major averages that are pushing against their upper bounds, and though HDGE is much more likely to take its cues from the market rather than the other way around, I will naturally be watching both in tandem as we wait to see whether the current rally is actually the start of another leg higher… or the last gasp of a bull market that may have actually come to an end last fall (with one heck of a bounce in between)! As always, please do not feel a need to own shares of this “short ETF” if it is not the sort of investment you care to make – simply “sitting on cash” is a fine way to go if you’re nervous! HDGE is a strong buy under $7 and a buy under $9.

Apple

On the one hand, I remain very optimistic about Apple’s long-term prospects, especially as the company continues to shift more and more towards being a “services” company; on the other hand, however, given Apple’s extensive exposure to international markets (along with the fact that it is clearly one of the companies that sits at “ground zero” of the trade war), this is another situation that I am concerned may already be “priced to perfection” over the near-term (i.e. even a positive outcome to the trade war may not be enough to push the stock into new high territory any time soon). In the meantime, I am taking advantage of the recent run to sell a few shares for other purchases. AAPL is a strong buy under $175 and a buy under $200.

Catasys

While the stock could just as easily fall back to $14 as it could push into new high territory in the weeks and months ahead, the bottom line is that the company is on a roll (and appears to potentially be on the verge of entering “the sweet spot” in terms of an accelerating growth trajectory) and the stock is acting well these days… and though it remains to be seen how the stock will act if the overall market decides to head south, history suggests that if things do break out to the upside, Catasys’ stock could be poised for some very nice gains as well! As always, your are encouraged to build a position via smaller purchases on a regular basis rather than a single large purchase! CATS is a strong buy under $14 and a buy under $22.

Celgene

With the price of Celgene’s stock becoming ever more closely tied to Bristol-Myers Squibb’s stock (BMY – $45.89) as the proposed merger between the two companies moves forward, it is no surprise that Celgene’s stock dropped in response Bristol’s falling when it was announced that Bristol was offering to divest itself of Celgene’s psoriasis drug Otezla (which did $1.6 billion in sales in 2018) as part of its efforts to convince regulators to allow the deal to go through. As mentioned above, though my current plan is to hold a position in Celgene at least through the completion of the merger, I am moving some of these bio/healthcare dollars into CATS and MNKD this month. CELG is a strong buy under $90 and a buy under $98.

Cirrus Logic

Though Cirrus’ stock has rallied nicely off the low that was set at the end of May, I am afraid that it has also run into resistance right where the chart suggests it should, namely, at the $45 level. That being said, though the pullback was expected at the $45 level, there is nothing that says the stock can’t absorb the expected selling pressure at that price level and then power higher in fairly short order, and rest assured that I will be watching this situation closely for clues about the health over not just stock and the sector, but the overall market as well (as long as the stock holds above $38, we don’t need to worry; if it happens to first clear $45 and then $50, it will be a bullish sign). CRUS is a strong buy under $36 and a buy under $42.

Cleveland-Cliffs

While the stock would also have to get through $12 and $13 after clearing $11 before we could say with confidence that a new uptrend may be getting underway, the stock has been demonstrating good relative strength lately, and though the company could just as easily deliver a negative outlook as a positive one when it reports earnings in a few weeks, given that the company has become much more of a domestic play over the past few years as part of its turnaround efforts (along with my eternal optimism that our fearless leaders will eventually address “infrastructure”), I am raising the buy limits slightly and adding a few more shares to both Portfolios this month. CLF is a strong buy under $10 and a buy under $13.

Electronic Arts

In what appears to be a classic (even if unexpected, at least by me) case of investors “selling the news,” EA’s stock has tumbled sharply over the past two days following the release of the latest installment of the company’s Apex Legends game. I find the sell-off to be more than a bit overdone (there is plenty going on at EA besides Apex), but I will also be the first to admit that if the stock is unable to above $89 in the weeks ahead, the chart will start to look decidedly more bearish (and, given EA’s prominence in the industry, it will be bearish for not just the stock but the market as a whole. Keeping that caveat in mind as part of your game plan, EA is a “first buy” this month. EA is a strong buy under $94 and a buy under $105.

First Solar

Nope, given all that has been going on in the world, not it my wildest dreams at the beginning of the year did I think that First Solar’s stock would be performing as well as it has been for the past six months, but 1) I’m not going to complain, and 2) though both Portfolios already own “enough” First Solar for the time being, I cannot emphasize enough that while it can sometimes be tough emotionally to buy stocks “that are already up so much,” you are encouraged to view the great relative strength we have been seeing lately as a reason to buy (provided the stock is still under the buy limit, of course) rather than sell. As part of a game plan to build a position over time, FSLR is a strong buy under $62 and a buy under $70.

Illumina

Wow! As you can see in the chart to the right, Illumina’s stock has been on fire lately, posting a gain of roughly 25% in just six weeks! Unfortunately, while the fact that it is pushing into new record high territory at such a furious pace is obviously a bullish sign of some sort, I am afraid that the price action we have been seeing is somewhat of an anomaly for the sector, and, thus, I think we need to wait to see how the stock acts once some profit-taking sets in before we can get too excited that Illumina is doing anything more than “marching to its own drummer,” so to speak, at this stage of the game (and I am lightening up our positions a bit to help pay for other purchases). ILMN is a strong buy under $340 and a buy under $365.

Luminex

Though I continue to believe that the combination of Luminex’s market cap and intellectual property portfolio makes it a potential takeover candidate, I will also be the first to admit that I cannot explain the persistent weakness we have been seeing in the stock for the past several months… and, because I cannot explain it (and would like to keep this month’s trades as close to “neutral” as possible in terms of balancing buys and sells), I am selling a few shares of Luminex out of both Portfolios in order to help pay for the purchase two other names in the biotech/healthcare space (CATS and MNKD), and with a reminder that I am NOT suggesting you exit your position altogether, LMNX is a strong buy under $18 and a buy under $22.

MannKind

When MannKind came public in 2004 with a market capitalization of just over $450 million, Afrezza and Technosphere were essentially both just ideas (nothing more!) that Al Mann hoped to turn into money makers; today, Afrezza is an FDA-approved product for a large and growing market (and TS has been validated on a number of fronts), and yet the company is being valued at less than half of what it came public at! Whether Castagna is actually on the verge of delivering a “win” with his game plan… or the activism from the folks at Vdex ends up helping to unlock value… or perhaps both… I believe the stock is extremely undervalued at current prices and should be bought. MNKD is a strong buy under $5 and a buy under $10.

NVIDIA

Though I remain quite optimistic about NVIDIA’s long-term potential, I have to admit that the way its stock has been performing (along with the price action seen in many of the other chip stocks that I keep my eye on) is part of what is making me somewhat skeptical about the health of the overall market. In particular, though the stock had been rallying ahead of (and then got a nice pop in response to) a positive exchange on the trade war front at the recent G-20 meeting, even with this “solidly positive news,” the stock has, thus far, still only managed to gain back roughly half of what it lost in the month of May (and I find this action to be “somewhat bearish”). NVDA remains a strong buy under $135 and a buy under $160.

NXP Semiconductor

Unfortunately, NXP’s stock tells a story very similar to NVIDIA’s… and, while there is nothing that says the stock can’t start hitting new 52-week highs again rather than re-testing the various lows that have been set over the past six months, as discussed above, I believe we have to be wary that perhaps all the good news is already factored into the market when it comes to the outlook for global trade (and this failure to set new highs on “good news,” in turn, means that the if the next card that gets turned over is a “setback” rather than “a step forward,” the market could perhaps tumble in fairly dramatic fashion). We are intentionally underweighted chip stock right now. NXPI is a strong buy under $85 and a buy under $95.

PowerShares DB Agriculture ETF

Though the basket of agricultural commodities associated with owning shares of DBA have collectively seen a nice bounce and consolidation off of the lows that were set in mid-May, there is no way to know which direction they are going to head next… but history suggests that if they do start to head lower rather than higher next, it will count as confirmation that the recent rally has really been nothing more than “a bounce” on the way to even lower lows as the global economy continues to slide in the face of an ever-growing number of headwinds on a variety of fronts. And, while it is also still essentially “just trading sideways,” unless/until shares of DBC can find their (continued under “DBC” below) DBA remains a buy under $18.

PowerShares DB Commodities ETF

(continuing from “DBA” above) footing, the longer-term trend suggests that “lower lows” are somewhat more likely than “higher highs,” and so I do not see any need to put much energy into building a position in DBC at this point in time either. That being said, inflation is notorious for flaring up when it is least expected, and though your guess is as good as mine as to how the phenomenon might manifest itself in the context of today’s global economy (and, of course, assuming that the combination of “the information era” and “interest rates around the globe essentially hugging either side of 0%” has not, in fact, killed off inflation once and for all!), at some point, I anticipate getting more aggressive. DBC is a buy under $17.

Qorvo

Yep – as I’m sure you can imagine (and as can be seen in the chart to the right), Qorvo’s is another chip stock that sold off on “bad news” related to the trade war with China in May… then regained roughly half its losses in June in response to “good news” on that front… which leaves us pondering the questions “how much better does the news have to get for the stock to start hitting new highs again?” and “if this is the best we can expect in response to good news, what’s going to happen if the next piece of news is negative rather than positive?”). With so many other “good ideas” to choose from right now, I am in no hurry to add to any of our chip positions. QRVO is considered a strong buy under $56 and a buy under $64.

Skyworks Solutions

With the silver lining for this story being that Skyworks’ stock has actually managed to first clear a key resistance level and then hold above it (at least for now), I am afraid that the bigger picture is still the same, namely, even with things “working out” on the trade war front, the stock is still trading quite a ways below where it was trading just a few months ago (and, unfortunately, this is one of the things that starts to happen more and more regularly as bear markets get underway… so we need to keep our eye on things across a variety of time-frames, not just the very short-term). With the same reminder that there does not seem to be an urgency for buying the stock, SWKS is a strong buy under $65 and a buy under $75.

SPDR Gold Trust ETF

As you can see in the chart to the right, shares of GLD gapped up into new 52-week high territory right after last month’s issue went to press… and, though it is only a one-year chart, what is especially exciting about the move is that it actually represents a push into new FIVE-year high territory as well (and such price action cannot be construed as anything but “bullish”)! To be sure, the trend could run out of steam as soon as Monday morning, but I continue to believe that there are many signs pointing to higher prices for gold in the years ahead, and though I am not adding to our positions this month, you are encouraged to continuing “nibbling regularly” on the precious metal! GLD is considered a buy under $135.

Tekla Life Sciences Investors

On the one hand, shares of HQL had a decent month of June; however, as you can see in the chart to the left, the longer-term trend still appears to be “down,” and, as those of you have been reading my thoughts in the newsletter for awhile now can probably surmise, I consider this to be a piece of evidence on the “bearish” side of the ledger for not just the fund itself but for the sector and market as a whole. That being said, there is a chance that the near-term low set in late May may end up holding, and, if it does, we will be able to start looking at the chart with a bit more optimism as time goes by; in the meantime, however, I am moving some HQL money into CATS and MNKD. HQL is a strong buy under $14 and buy under $17.

Walt Disney Co.

As you can see in the chart to the right, not only did Disney’s stock manage to hold all of its gains for at least a month after gapping up sharply in mid-April, after going through that consolidation period, it is now grinding steadily higher and is once again on the verge of pushing into new all-time high territory (a situation that cannot be thought of as anything but “bullish”). Though we already own “enough” in both Portfolios (at least for now), this stock should definitely be on your “first buy” list if you are still working on becoming fully invested with your “Nate’s Notes money,” and, as long as the stock is below the buy limit, you should look at strength as a reason to buy. DIS is a strong buy under $132 and a buy under $148.