WHAT TO DO NOW: We have no changes in the Model Portfolio tonight, but we’re sending a special bulletin given the wild action in growth stocks over the past two days. We’re not complacent, and have a couple of names on tight-ish leashes, but given that our stocks are mostly above support, are showing us profits and that the Model Portfolio is one-third in cash, we’re standing pat. Updates on our thoughts, and our stocks, below.
There’s been no change with our overall market timing, but the big story in the market is the rotation of late—it began last week, but kicked into high gear over the past two days, with many growth stocks getting whacked after big runs.
The action isn’t wholly unexpected—we’ve been writing about the risks of such a divergent environment, which is a big reason we’ve kept one-third of the Model Portfolio in cash and did a little trimming two weeks ago—but it’s still shaken things up.
That said, when looking through the charts, the good news is that few stocks have truly broken down; most had such big runs from the March lows that even the sharp downside action never saw stocks tag their 50-day lines. Plus, today showed solid support as the day wore on, which is always a plus.
The real question is how to react to the sudden selling. For that, a lot depends on your portfolio (if you’re heavily invested, consider trimming a couple of positions) and when you bought (more recent purchases that show losses should be kept on tight leashes or kicked out).
In terms of the Model Portfolio, we came into the week with a good-sized cash position of around 33% and most holdings were at solid profits, so we’re not anxious to throw anything overboard. Of course, we’re also not complacent, and if today’s selling continues, we’ll probably pare back in the near future. But given the shakeout and today’s support, we’re standing pat tonight.
On the buy side, we could actually do some nibbling on some leaders that have pulled back, but we prefer to wait for growth stocks to stabilize before putting more money to work.
Let’s quickly run through the Model Portfolio’s stocks.
Chegg (CHGG): Our timing couldn’t have been worse on the half-position buy (last Friday), but the chart looks reasonable here. We have a mental stop in the 54 area (a bit under a 20% loss on the half-sized position = less than 1% risk to the overall portfolio), and if things get ugly we’ll cut bait. But right here we’re sitting tight … and are fine adding a small position if you don’t own any. BUY A HALF.
Chewy (CHWY): CHWY is the closest of our stocks to getting sold. That said, while it knifed below support this morning, it actually closed back above its 50-day line. A drop of a point or two from here and we’ll probably get out, but tonight, we’ll continue to hold—albeit with a tight leash. HOLD.
Cloudflare (NET): NET looks just fine—it kissed its 25-day line this morning and bounced excellently, probably because big investors are still building positions in this relatively new issue. In fact, should growth stocks settle down in the days ahead, we could fill out our position (i.e., add another 5% position). If you don’t own any, we’re OK buying a small position here. BUY A HALF.
Dexcom (DXCM): The recent action in DXCM is why we trimmed a quarter of our position two weeks ago and went to a Hold rating. The selloff is more severe than we expected, and given that shares have had such a big run since their November breakout, further digestion could be in the offing. That said, having taken partial profits twice, with good gains on the remaining shares and with the stock still north of its 50-day line (which is down near 320), we advise hanging on. Just for some perspective, DXCM’s pre-COVID high was around 305. HOLD.
DocuSign (DOCU): Similar thoughts as DXCM—it was sticking straight up in the air and had earnings coming, so we trimmed a quarter of our position two weeks ago (we had already sold one-third of our initial stake a few months before). Believe it or not, today’s drop didn’t even touch the 25-day line (now near 116) and it bounced nicely, so we’re fine holding the rest—though again, it could easily need some time to consolidate. HOLD.
Okta (OKTA): OKTA fell from a high of 197 yesterday to a low of 167 today, mostly because of the environment, but likely partially due to profit taking ahead of earnings, which are due out tomorrow evening (May 28). Today’s drop tagged the rising 25-day line (near 168) before bouncing, so this drop fits into the “sharp but acceptable” category. We’ll stay on Buy, but any new positions at this point should be kept very small given the upcoming report. BUY.
Teladoc (TDOC): TDOC broke its 50-day line today, which makes it our weakest stock. That said, it never came close to our mental stop in the low 140s and we want to give it room to shake out the weak hands. The afternoon rebound was also a plus. We’re watching it closely, but at this point, we’re comfortable holding our remaining shares. HOLD.
Twilio (TWLO): Like everything else in growth-land, TWLO fell sharply yesterday and this morning, but hasn’t done anything wrong given the prior gap and run and bounced nicely off today’s lows. Hold if you own some, and if you don’t, we’re OK buying some here or on further weakness. BUY.
Vertex Pharmaceuticals (VRTX): On one hand, VRTX fell down to its 50-day line today, which makes it weaker than most of the best leaders in the market. However, it actually ended up finishing nicely into the green today, which tells us big investors are still supporting the stock at logical levels. If the stock slips from here, we could move to Hold, but at this point we see no reason to change our Buy rating. BUY.
We’ll be sending the regularly scheduled update tomorrow (Thursday, May 28). Please don’t hesitate to email (mike@cabotwealth.com) with any questions.