WHAT TO DO NOW: Growth stocks (and, today, the market as a whole) are seeing follow-on selling after last week’s crack. Many stocks are pulling in normally, but some aren’t, including a couple of our names. In the Model Portfolio, we’re forced to cut bait with DocuSign (DOCU) and we’re placing Cloudflare (NET) on Hold. We came into this week with around 36% in cash, and today’s sell will lift that to a beefy 45%.
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Yesterday the major indexes finished mixed, with the Dow up 71 points and the Nasdaq down 78 points. But the story of the day (and the prior Friday) was a renewed rotation out of growth stocks, with most leading titles down 2% to 3% yesterday alone and a couple more cracking near-term support.
And this morning, that selling is broadening out, with growth (and most everything else) getting walloped—as of 10:45 am ET, the Dow is down 318 points while the Nasdaq is off 324 points (2.2%).
As we wrote last week, after a big breakdown like we saw last Monday, odds favor further reverberations; yes, sometimes that proves to be a shakeout, but after such a long advance (since November for the S&P 500), it was a decent bet we’d see another wave of selling, which is obviously taking place, especially among growth stocks, which had been showing relative strength.
Now, it’s not all bad out there—the major indexes are still well above their lows from last week, and even among growth titles, most are still in decent shape, with the stocks we’re watching closest so far retreating normally. Don’t get us wrong, there are more than a few springing leaks, but the majority aren’t crashing and burning.
All in all, what’s clear is that the environment is not healthy right now: Maybe this second selling wave ends abruptly, or maybe it carries on for a few weeks, but there’s no question that, at best, growth stocks remain tricky and challenging and the general market is iffy. It’s not 2008, but it’s best to think more about capital preservation until the buyers reappear.
In the Model Portfolio, it’s been a similar story to what we’re seeing in the entire market—DVN looks great as cyclicals catch a bid, FND is still holding pretty well given what’s going on, and even our remaining shares of SSO are more neutral than anything. But our growth issues are under pressure, with two looking poor.
The first is DocuSign (DOCU), which has fallen to new correction lows—there could be some support around here, but it’s clearly our weakest stock and we have a loss. If you want to sell some/hold some and look for a bounce, that’s fine, but we had a mental stop near 260 and the stock is cracking that today. We’re selling our position. SELL
The second is Cloudflare (NET), which was hitting new highs in the middle of last week but since then has shown abnormal action, including moving beneath its 50-day line today. We’re moving to Hold and will watch it closely for signs of support; how strong any bounce is will tell us whether this is a brief selling wave or something longer lasting. HOLD
We came into this week with 36% in cash, and the sale of DOCU will lift our cash position to the 45% range, which is a good amount of cushion. If need be, we’ll raise more cash, but as has been the case all year we’re keeping our eyes open—if growth can find a sustainable low, we could put a little cash to work if the right setups emerge.
Right now, we’re content to mostly play defense and seeing how this latest selling wave unfolds.
We’ll have more in Thursday’s update (or, if necessary, more special bulletins this week)—until then, don’t hesitate to email me mike@cabotwealth.com with any questions.