WHAT TO DO NOW: Today’s market meltdown is turning our Cabot Tides negative, which, following the many yellow flags in recent weeks, has us paring back some. Coming into today, the Model Portfolio was holding 17% cash, and today, we’re boosting that a bit by selling one-third of both Inphi (IPHI) and Sea Ltd (SE), giving us around 24% in cash. We’re also placing some stocks on Hold given the environment. Going forward, we could easily raise more cash, and will send more special bulletins if need be, but right now IPHI and SE partial sales are the only changes.
The market finished last week in poor fashion, and a slew of new coronavirus cases outside of China are causing the sellers to run wild on Wall Street this morning. As of 10:30 am, the Dow is down 787 points (~2.7%) and the Nasdaq is down a huge 295 points (~3.1%).
Today’s move has pushed our intermediate-term Cabot Tides to a clear sell signal, and given that this comes on the heels of (a) a huge run in the market during the past few months, (b) some climactic-looking runs in a handful of speculative stocks and (c) a growing number of yellow flags (divergences, etc.) over the past month, the odds are against this being “just” a one- or two-day shakeout.
That said, the odds are also against this being the end of the bull market. Our Cabot Trend Lines are solidly positive, and while we’re seeing some abnormal selling, the larger, longer-term uptrends in almost all leaders remain up.
Long story short, we’re likely in some sort of market correction that will take time to play out and bring with it many sharp, news-driven moves (up and down). We’ll follow the usual game plan—hold some cash, keep losers and laggards on tight leashes and try to hold most of our relatively resilient winners, which we still think can head higher over time.
In the Model Portfolio, we came into today with 17% in cash, and we’ll push that a bit higher by selling one-third of both Inphi (IPHI) and Sea Ltd (SE). That will leave us with 24% in cash. If you came into today heavily invested or on margin, we’d advise being more aggressive in raising some cash, but for us, the two partial moves are enough for now—but we’ll obviously be watching things closely and
Brief thoughts on all our stocks below.
Dexcom (DXCM): Firmly rejected at the 300 level but the damage has been limited and shares are still in fine shape thanks to its earnings gap. Still on Buy but keep it small and on weakness. BUY.
Dynatrace (DT): Couldn’t have had worse timing on this half-position Buy last week. Honestly, the chart still looks fine—shares just dipped to their 25-day line this morning—but I’m quickly moving to a Hold rating given our loss and the Tides. HOLD.
DocuSign (DOCU): A sharp pullback, but it comes after a big run and we’ve already taken partial profits. Staying on Buy, but the usual rules apply—keep it small in this environment. BUY.
Inphi (IPHI): The main trend is up here, but there was huge-volume churning on earnings and the stock is cracking its 50-day line this morning. We’re going to sell one-third of our shares and hold the rest with a fairly tight mental stop (mid 70s). SELL ONE-THIRD, HOLD THE REST.
Proshares S&P 500 (SSO): We already sold one-third of our SSO position during the first virus-induced selling wave in January, so we’re going to hold the rest here and see how this correction progresses. If you want to sell another slice, we wouldn’t blame you, but we’ll stand pat. We will, however, move to Hold given the Tides sell signal. HOLD.
Redfin (RDFN): As with DT, the timing was brutal buying just before this monster gap down. That said, the stock looks fine so far—if you haven’t bought a small position, you can here. BUY A HALF.
Sea Ltd (SE): SE is getting hit pretty hard this morning, as fears of a sharp economic slowdown across Asia (not just China) are spiking. The stock looks fine, but it’s extended after its good run, and could be in the crosshairs of future virus worries. We’ll book partial profits (sell one-third of our shares) here, with a mental stop for the rest near our average cost (under 42). SELL ONE-THIRD, HOLD THE REST.
Teladoc (TDOC): We were debating taking partial profits in TDOC, but so far this morning, it’s showing encouraging relative strength. Earnings are due out Wednesday. We’ll go to Hold here because of the Tides and the upcoming earnings report and see how thing go. HOLD.
Vertex Pharm (VRTX): Hit this morning a few points but still north of its 25-day line. Even so, we think it’s prudent to move to Hold here given the market. HOLD.
That’s all for now—your next scheduled message is Thursday’s (February 27) issue of Cabot’s Growth Investor, though we’ll be on the horn before then if we have any further changes. Don’t hesitate to contact me (mike@cabotwealth.com) with any questions before then.