WHAT TO DO NOW: Continue to take things on a stock-by-stock basis. We’ve seen a buyers’ strike during the past two weeks, with many stocks and indexes falling under their own weight; our Cabot Tides buy signal has vanished, with the market now nine weeks into a rest after the March-August advance. Moreover, while many stocks are doing OK, some are breaking down. In the Model Portfolio, we’re going to sell Dexcom (DXCM), taking the rest of our profit, and Penn National (PENN), cutting our loss, which will leave us with around 37% in cash.
The market is getting hit very hard this morning on heightened fears of further virus-related shutdowns. As of 11:30 a.m. ET, the Dow is down 856 points and the Nasdaq is off 353 points (2.9%), continuing the slippage we’ve seen during the past two-plus weeks.
The weakness has erased the buy signal from our Cabot Tides. Broadly speaking, the intermediate-term trend is now sideways-to-down, as most major indexes are in their ninth week of up-and-down action since the early-September peak. But however you define it, the intermediate-term trend is definitely not up and that calls for some defensive action.
For growth stocks, the past couple of weeks have been painful, with a bunch of names falling under their own weight, often giving up a good-sized chunk of real estate on light volume. To be fair, there are still plenty of stocks holding up pretty well and some that are even popping higher before or after earnings, but for every good-looking name, there are one or two springing a leak.
We came into this week with 26% in cash in the Model Portfolio, which has cushioned the blow a bit, and we continue to take things on a stock-by-stock basis—many of the names we own look OK, but some are coming under pressure. We have updates on a few of them below, including two sells:
The first is Dexcom (DXCM), which, in an odd move, preannounced good-not-great Q3 revenues on Monday evening (one day before officially reporting numbers), followed by the full quarterly report last night. The numbers were good, but fears of competition have ramped up, and it’s a fact that sales growth this quarter (up 26%) continued a trend of decelerating growth. More important, the stock was hit very hard yesterday and today, arguably cracking its longer-term uptrend. We’ve practiced plenty of patience here, but it looks like investor perception is waning. We’ll take the rest of our profit today. SELL.
We’re also going to cut bait on our recent addition Penn National (PENN), as the stock has tripped our stop. We’ve had lots of good trades this year, but PENN was the opposite of that, as we stepped in just ahead of the market’s latest two-plus-week decline. The company will report Q3 results, which could always change the landscape, but we’re forced to follow the rules—thankfully, it was just a half position, but we are forced to cut the loss here. SELL.
Given the fact that the Tides buy signal has gone by the wayside, we’re going to go back to Hold with the ProShares Ultra S&P 500 Fund (SSO), which tracks the S&P 500 on a 2-to-1 basis (up or down). We still believe this is a bull market and want to play out our remaining position here over time (we took partial profits a few weeks back), but with so many crosscurrents out there we’d rather nibble at stronger situations. HOLD.
Lastly, Twilio (TWLO) reported earnings on Monday evening, and the reaction was poor, continuing the stock’s pullback from its recent highs. In the near-term, the stock’s reaction to earnings and the giveback of its recent breakout probably is a sign the stock (like the market) might need more time to rest after the big March-August run. Even so, TWLO has done nothing wrong, and the growth story remains pristine—much more weakness could have us flipping to a Hold rating, but we’ll stay on Buy, thinking this dip could provide new buyers a chance to get a reasonable price. BUY.
Our other stocks have all taken hits here or there, but most remain in decent enough shape; we’ll keep their ratings in place for now, but will have more in Thursday’s regularly scheduled update. On a more positive note, if the bulls can step in relatively soon, we think there could be a bunch of good entry points (most leaders haven’t cracked yet). But until the market finds its footing, we wouldn’t try to be a hero.
Your next scheduled message is this Thursday’s (October 29) weekly update. Don’t hesitate to email (mike@cabotwealth.com) me any questions you have in the meantime.