The market has looked vulnerable to a pullback for a while, and we seemed to be getting a normal one for most of last week. But the new China tariffs threw a grenade into the market, and the action we’ve seen since then is abnormal, with the major indexes and many extended leading stocks cracking their intermediate-term uptrends.
Today, in fact, the Dow imploded 767 points while the Nasdaq plunged 278 points.
Longer term, our Cabot Trend Lines are still positive and the evidence remains in favor of the overall bull market having another leg up down the road. But our Cabot Tides are decisively negative, and along with the big-volume selling in many leaders, we’re peeling back.
In the Model Portfolio, we have a few changes tonight.
First, we’re going to sell our remaining shares of Twilio (TWLO), which has completely broken down and is our weakest stock. The company appears to be doing fine, but shares stalled out in June and July and the recent collapse is a red flag.
Second, we’re going to sell our half position in Elastic (ESTC), whose breakout has failed and is now showing us a loss.
And third, we’re going to sell the add-on position we recently bought in ProShares S&P 500 Fund (SSO), again cutting the loss short and decreasing our exposure to a leveraged long fun in a market correction. (It correlates to selling about 30% of our total SSO stake we’re currently holding.)
We’re also going to place everything else on Hold except Chipotle (CMG) and Snap (SNAP), which are holding up relatively well.
These moves will boost our cash position to around 30%. We have other names on tight leashes and could jettison them in the days or weeks ahead, but we’ll see how the market and individual stocks act following a four-day plunge.
Looking ahead, things are obviously very news-driven, and to this point the fresher growth stocks that just got going in May, June or July are actually holding up fairly well. Thus, we’re not ruling anything out—should the buyers return and the Tides move back to a positive stance, we’ll be ready to jump on some newer leaders.
But until then, the breakdowns of the past few days tell us that, at the very least, time will likely be needed for the market and stocks to repair the damage. So it’s best to cut back and watch your remaining stocks closely.