WHAT TO DO NOW: It’s still a bull market, but our Cabot Tides are close to the fence and the odds are that the recent burst in selling pressures probably won’t go away overnight. Thus, we’re going to trim a bit in the Portfolio tonight, selling one-third of our positions in both DocuSign (DOCU) and ProShares Ultra S&P 500 Fund (SSO), which will leave us with 20% in cash. We’re also placing Qorvo (QRVO) on Hold. Details below.
Today’s Action
The spread of the coronavirus in China and elsewhere finally caused the sellers to come out in force today—at the close, the Dow was off a big 454 points and the Nasdaq fell 176 points. That puts our intermediate-term Cabot Tides on the fence.
While opinions come fast and furiously when the market makes a big move on headline news, it’s best to keep your eyes glued to the evidence of what the market and leading stocks are actually doing. And with that in mind, we have a couple of thoughts.
First, in the short-term, it’s likely that following a four-month run and some decisive near-term declines, the market and many stocks probably need more time to consolidate—it (usually) takes time for investors to de-risk a bit, rotate their portfolios, hedge or trim, and so on.
Second, looking at the bigger picture, nothing has changed the fact that (a) this is a bull market and (b) numerous factors tell us that higher prices are likely down the road. And the fact that the virus problem has quickly become obvious lessens the chance that it will turn into a longer-term issue.
We’ll be watching how things unfold, but right here, the odds favor some further pain/pullbacks in the near-term, though we’d expect the best leading stocks to hold key support and, eventually, resume their rallies.
Thus, given all of the evidence, you should follow the usual playbook: Consider paring back on losers/laggards and even taking partial profits on some winners, while holding on tightly to your top performers.
In the Model Portfolio, we came into today around 12% in cash, but we have a couple of changes tonight.
First, we’re going to sell one-third of our (oversized) position in ProShares Ultra S&P 500 Fund (SSO), booking partial profits after what’s been a great run.
We’re also going to sell one-third of our total position in DocuSign (DOCU), for the simple reason that it’s been our weakest stock (it’s not that weak, but hasn’t been advancing during the past few weeks with most others).
Finally, we’re going to place Qorvo (QRVO) on Hold—most chip-related stocks got hit hard today as they’re tied to Asian production and demand, and QRVO dipped a bit below its 50-day line. We’ll go to Hold and see how the stock acts going forward, including in reaction to earnings on January 29.
We’ll keep buy ratings on our other stocks, though it’s probably best to keep new buys on the smaller side due to the market’s wobbles and (more importantly) upcoming earnings reports in many names.
The two partial sales will leave us with around 20% in cash, and from here we’ll just take it as it comes; we’re not opposed to raising more cash if the sellers do further damage, but we’re not advising stampeding for the exits, either.
We’ll be sending the next issue per usual on Thursday (January 30). Please don’t hesitate to email (mike@cabotwealth.com) with any questions.