WHAT TO DO NOW: The overall market isn’t cracking yet, but growth stocks are beginning to flash lots of abnormal action. With our trend-following indicators still positive, we wouldn’t sell wholesale, especially if you came into this week with some cash (we had 20% in the Model Portfolio). But we are making some changes today—we’re selling CrowdStrike (CRWD) and taking a small profit, while placing NovoCure (NVCR), Twilio (TWLO) and Uber (UBER) on Hold. Our cash position will now be around 31%.
After getting bludgeoned yesterday, growth stocks are doing even worse today, with crash-type losses this morning among many leading stocks. As of noon eastern, the Dow is off 179 points but the Nasdaq is off 300 points and that’s after a rebound from this morning’s lows.
The Nasdaq has fallen from new highs a few trading days ago to below its 50-day line this morning (now sitting right on it), which is abnormal action. To be fair, the broad market is in much better shape—none of the other major indexes we track are falling apart, while some cyclical areas are actually holding well.
Thus, in and of itself, it’s possible this decline is another brief-but-painful rotation out of growth stocks; because our trend-following measures are bullish, we’re not advising selling wholesale into today’s decline.
However, it’s important to realize that the selling this week isn’t occurring in a vacuum—we’re now 16-plus weeks into this intermediate-term rally and, as we’ve been writing for a while, sentiment is jubilant (lots of late-in-the-advance type of action), all of which means risk is elevated. Combined with some clear breakdowns among a bunch of stocks and we’re taking a step back today and throwing up some safety nets.
Let’s go through the Model Portfolio stock by stock:
CRWD: We still enthuse about this story, but the action of late looks abnormal to us—shares have plunged nearly 20% in just a few days, including a gap below its 50-day line (it’s still below that line as we write), all while many peers do the same. Could today see some major shakeout? It’s possible, yes, but we don’t have much profit left and the recent action looks like a red flag to us. We’ll sell and take our modest profit here. SELL.
FIVE: Shares nearly touched their 50-day line this morning before bouncing. It’s possible the stock has double-topped near the 200 area, but the damage isn’t bad, we’ve already taken partial profits (sold a third of our stake in late January) and FIVE just got going from a two-year rest in September. We’re hanging on, and if you don’t own any, we’re OK nibbling here. BUY.
HALO: The fact that HALO has been stalling out for a while is a worry, but it’s found some support this morning and remains perched above its 50-day line. More important will be earnings tonight—we’re still optimistic, and will stay on Buy, though it’s probably better if you just wait to see what comes after earnings. So far, we’re fine with HALO and if it can get through the quarterly report we think it has a bright future. BUY.
NVCR: The chart isn’t a horror show per se, as NVCR is back into its December/January range (153 to 180 or so). Plus, like HALO, NovoCure has earnings on tap later this week (Thursday), which will be key. Respecting the dip below the 50-day line, though, we’ll switch to Hold and see what the quarterly report brings. HOLD.
PINS: PINS had a whopping big decline at the open (seemed like some sort of forced selling) before finding support. The decline has been fierce, but bigger picture, shares are (as we write this) above the highs of the range they occupied for much of December and January. If you have a loss, a drop under 70 could be your line in the sand, but we’ve already taken partial profits twice and PINS should be early-ish in its overall advance (just got going in September/October). Hold if you have a good profit, and if you’re not in, we’re not opposed to nibbling here. BUY.
ROKU: ROKU has been extended for some time, so this week’s dive in the stock isn’t overly surprising. If you have a big position (whatever that means to you), lightening up makes sense; our guess is that the stock will need time to consolidate its big gains. However, we’ve already taken chips off the table twice in ROKU, so we’re OK using a loose leash with our remaining position. HOLD.
SSO: Nearly tagged its 50-day line this morning before bouncing a bit. Obviously, if this is the start of a “real” correction SSO will come in, but right now the trend is up and the S&P 500 looks to be in a normal pullback phase. BUY.
TWLO: We have quickly become apprehensive about TWLO for a few reasons. First, the stock’s action remains wild (400 to 330 to 460 to 380, all within four weeks); coming after a huge run since last May, this up-down-up-down action is usually a sign of distribution. Moreover, last week, the company executed yet another share offering ($1.54 billion worth), which comes after a share-based acquisition of Segment ($3.2 billion) and a previous share offering last August ($1.25 billion). Granted, the Segment buyout should be a good thing, but that’s a lot of dilution, and the stock has had a huge run (175 breakout last May to nearly 460 last week after earnings). We’re not jumping out here, but it’s prudent to move to Hold and will likely use a relatively tight mental stop for the time being. HOLD.
UBER: The stock has again turned sloppy, first after a so-so Q4 report, then due to an unfavorable court ruling in Britain (drivers are employees) and now, of course, due to the market. We continue to think the November blastoff will lead to good things, so we’re willing to give UBER some rope. But it’s also true that we don’t have much profit after three-ish months of owning the stock, and the fact that the stock’s great-looking shakeout and pre-earnings rally has fizzled isn’t great. We’ll switch back to a Hold and use a stop in the 50 area. HOLD.
Don’t hesitate to email me directly (mike@cabotwealth.com) with questions.