WHAT TO DO NOW: Do a little trimming. Our market timing indicators are still positive, though our Cabot Tides are effectively on the fence. More important, after huge, huge moves, many growth stocks are showing some near- and intermediate-term topping signs. Of course, one bad day doesn’t make a trend, so we don’t advise turning defensive, but we are paring back today by making two moves—first, we’re going to take our profit in Vertex (VRTX), and second, we’re going to take partial profits in Okta (OKTA), selling one-third of our position. That will bring our cash position up to around 20%.
The market had a very rough day yesterday, with the Dow closing up 10 points (there was some rotation into lagging areas) but the Nasdaq reversed from huge gains to finish down 227 points. And the leading growth contingent was hit very hard; the average stock we own and watch was down nearly 6%.
Stepping back, the market’s long-term trend (Cabot Trend Lines) remains firmly up, though our Cabot Tides are still on the fence as the broad market indexes (small caps, mid caps, etc.) sit on their 50-day lines. That said, most of the other indicators (Aggression and Real Money Indexes) look fine, and despite yesterday’s bloodletting, the trends of just about every leading stock are still up.
That said, you also shouldn’t leave your brain at the door: Many growth stocks have had gigantic runs since the March bottom, to the point that a bunch have gone out of trend on the upside in the intermediate-term. Time is also a factor—this initial upmove since the crash has lasted 16 weeks, which is a period of time that often (not always) coincides with a market’s first pullback. (We’ll write more about this in Thursday’s issue.)
All in all, we view this as yet another shot across the market’s bow—it’s possible this becomes just another one- or two-day wobble before another push higher, but risk is rising that growth stocks (and possibly the market as a whole) need a “real” correction. We’ll see how it plays out.
In the meantime, because most of the evidence remains positive, we don’t advise selling wholesale; one day doesn’t make a trend. But we are going to pare back a bit given the risks. First, we’re going to sell Vertex (VRTX), which has been a solid performer, but has been stalling out a bit in recent weeks. We’ll take our profit and hold the cash.
We’re also going to take partial profits in Okta (OKTA)—we still think it’s a leader, but we’re going to take a little money off the table here as it’s our biggest position. We’re also moving Dexcom (DXCM) back to Hold.
Those moves will boost our cash position to nearly 20%. As always, we could go in either direction—buy or sell—moving forward based on how the market and growth stocks perform.
Let’s quickly run through all our stocks to share our thoughts.
Chegg (CHGG): Ugly reversal yesterday, but as this comes after a really nice move since mid-June, it still looks OK. BUY.
Cloudflare (NET): Definitely seen some churning last Friday and Monday, but that was half-expected after its recent pop. We’re also putting more weight on the stock’s record-volume advance four weeks ago. We’ll stay on Buy. BUY.
Dexcom (DXCM): We’re moving back to Hold here—the low-volume breakout has failed, and the relative performance (RP) line is no higher than it was in early May. We’re OK giving the stock some rope, but it does look a bit double-toppy here. HOLD.
DocuSign (DOCU): Frankly, it’s not out of the realm we could rake in the rest of our profit here given how big a run DOCU has had. That said, we’ve already taken partial profits three times so we’re willing to give the stock room here and see how it goes. HOLD.
Okta (OKTA): Still think it’s a leader in the cybersecurity space, but yesterday was definitely a bad day and it’s our largest position (~12% of the Model Portfolio) so we’re going to sell one-third here and hold the rest. SELL ONE-THIRD, HOLD THE REST.
ProShares Ultra S&P 500 Fund (SSO): Sticking with a similar game plan—a drop below 120 or so would have us going to Hold, and down to 110 would likely have us cutting the loss. But so far, we’re at a profit and are fine with it given the evidence. BUY.
Teladoc (TDOC): Reversed yesterday with everything else, but given the recent upmove it doesn’t look bad at all. We’d probably keep new buys small and aim for weakness if you want in. BUY.
Twilio (TWLO): Low-volume decline yesterday. Could certainly pull in further, but it’s acting normally so far. BUY.
Vertex (VRTX): It’s not awful, and we don’t expect a major implosion, but it’s been choppy for a while and buying has dried up in recent weeks. If you want to hold with a tight stop, that’s fine, but we’ll take our 40%-plus profit off the table. SELL.
Wingstop (WING): Taken a hit for sure, and it’s approaching its 50-day line (near 126). How it acts from here will be key. Still, if you own some, we’d hang on, and if you don’t, we’re OK taking a stab at it here. A drop below 115 or so would be abnormal. BUY.