August 17, 2023

WHAT TO DO NOW: Remain cautious. The selling is spreading out now, so much so that our Cabot Tides have flipped to a sell signal as the number of new lows picks up. The odds still favor this being a correction, not a massive new downtrend, but most stocks (and especially growth stocks) remain under the gun. Tonight, we’re forced to sell our small remaining position in Shift4 (FOUR), which we gave every chance to hold up but has decisive broken down. We’ll also place ProShares S&P 500 Fund (SSO) on Hold given the Tides signal, though we’re holding onto what we own. All told, our cash position will be around 55%.

Current Market Environment

As of 12:45 ET, the major indexes are flat and mixed (S&P 500 up 0.1%, Nasdaq down 0.2%), but growth funds and growth stocks are performing worse than that, with more than a few names still under the gun.

All told, then, the market’s correction continues, and it’s now spreading to the rest of the market—all five of the indexes we track are now below their 50-day lines, which flips our intermediate-term Cabot Tides to a sell signal. We’re also seeing the number of new lows pick up (our Two-Second Indicator), confirming the market’s weakness.

Of course, our long-term Cabot Trend Lines are solidly positive, and numerous studies (mostly based on the market action in May and June) and other factors (defensive stocks are nearly as sick as other areas) tell us the odds favor higher prices down the road.

In other words, the evidence is mirroring what we’ve been thinking for a bit now—the current environment is unfavorable, but there should be an upside resumption once the correction finishes up.

As always, we’ll just take it one day at a time and see how it goes. Right now, the main piece of secondary evidence we’re watching are interest rates—yields are threatening to break out on the upside, and while that wouldn’t guarantee something bearish, it likely would keep the pressure on stocks—and especially growth stocks, which remain under pressure most days. Indeed, the charts of a variety of glamour-type funds (IWO, IPO, SMH, even things like ARKK, etc.) look sick, with straight-down action that has easily knifed below intermediate-term support. Even the best of these aforementioned funds are off 8% to 9% so far this month!

To be fair, we are seeing some sentiment measures show real discomfort now (put-call ratios are starting to spike), so we’re open to anything, but we’re content to sit in a cautious stance until we see the market and growth stocks find a low and show some upside power. In the Model Portfolio, we’ve already bailed on a bunch of names and came into this week with a bit over half the portfolio in cash.

But with the continued wobbles we’re going to trim one more name: We’ve given our small remaining portion of Shift4 (FOUR) every chance to hold up, but we’re forced to sell as the stock (and some of its peers) cascade lower.

That will leave us with around 55% in cash—we’re not ruling out a small new position or two if the market stabilizes, though we could trim further if the selling gets out of hand. For now, we think staying cautious but keeping a few lines in the water makes sense. Details below.

Model Portfolio

Celsius (CELH) is giving up some ground today, though it’s hardly surprising given the recent rally and the market environment. Near term, further wobbles are possible, even likely, as investors take some profits; if you have a big position for your account (whatever that means to you), it’s fine if you want to trim. But we’re thinking support should appear on further dips as there simply aren’t many growth stories that look to be as durable as CELH, and let’s not forget that the stock lifted off from an 18-month bear market consolidation in May, “only” three months ago; with 617 funds onboard, the stock should be far from over-owned. We’ll change if the facts do, but at this point, we’re holding our shares, and if you don’t own any, you can look to start a position here or on further dips. BUY

DoubleVerify (DV) has finally stopped going down, outperforming the market a smidge in the past few sessions. That’s hardly a reason to celebrate, though we’re going to hold our small-ish position a bit longer—shares found support right where they were “supposed to” (near the prior breakout area), and if they can hold up a bit longer, we think a solid bounce is possible. Our leash is very tight, but at this point, we’ll hold the rest of our DV and see if the nascent rebound can continue. HOLD

DraftKings (DKNG) was moved to Hold last week after the stock was hit hard following the Penn National/ESPN deal, and it’s dipped further since (albeit on very light volume). What’s interesting is that PENN is also weak, giving up all of its deal-induced pop and more. Let’s not forget that Q2 displayed the true potential of the company, with still-massive revenue growth and positive EBITDA—like Celsius, it looks like a rapid, reliable growth story that should play out for a long time. With just a half position and a big cash position, we’re willing to give DKNG a bit more rope, maybe a point or two, but we won’t just hold and hope if the slide continues. Hold for now. HOLD

As we’ve written many times, the odds favor the next major move in the major indexes being up—but we’re also not one to argue much with the current batch of evidence. So with our Cabot Tides negative and with the number of new lows picking up, we’re going to place ProShares Ultra S&P 500 Fund (SSO) on Hold tonight and see how it goes. As with everything else, we won’t hesitate to trim if things really get out of hand, but so far SSO is off 8.5% from its highs, and two or three good days on the upside could change the landscape for the S&P 500. Moving to Hold, but if you’re already in, sit tight with what you have. HOLD

We sold partial chunks of Shift4 Payments (FOUR) twice before, and we’ve clearly given the stock every chance to hold support and get going—but now FOUR has decisively broken down, egged on by horrid action from most of its peers (go look at the action of PYPL and SQ). It’s very frustrating as the story has played out exactly as we thought it would many months ago, with future estimates of earnings and cash flow looking great—but for whatever reason, investor perception continues to tank. We’ll sell our last small piece belatedly and hold the cash. SELL

Uber (UBER) remains one of the relatively few growth-oriented names that is acting normally—not amazingly well, of course, but pulling back to the 50-day line area on light volume. Obviously, if the economy implodes, all bets are off for just about every company, but barring that there’s little doubt that Uber should see soaring EBITDA and free cash flow in the quarters to come. Of course, good tidings haven’t mattered much in this market, and if UBER sinks much from here, we could trim our position. But all told, the odds still favor the next big move being up. Hold on if you own some, and if not, you could start a small position around here. BUY

Watch List

Boot Barn (BOOT): BOOT is a part turnaround, part cookie-cutter story, with a reasonable valuation and a long runway of growth. The stock has been a bit sloppy since earnings, though the overall uptrend is intact.

Confluent (CFLT): It’s been up and down, but CFLT has basically been in the 32 to 38 range for the past three months. We love the story here, and the longer the stock can hold up, the greater the chance it can turn up once the market snaps out of its funk.

Freshpet (FRPT): FRPT continues to hold its breakout from two weeks ago, and the story here should produce rapid and reliable growth for a long time. Our only rub is that the stock is a bit thinly traded for our tastes, but it may be “growing up” now that the firm has shaped up its operations.

Monday.com (MNDY): Most of the stocks we’ve sold in recent weeks are looking sick, but after being forced out of MNDY last week, the stock powered ahead on earnings on Monday. Not surprisingly, it’s wobbled since and isn’t out of the woods, but a few good days would have the stock looking ready to go. As for the report, earnings crushed expectations, though sales growth is slowing a fair amount.

Noble (NE): NE continues to hold firm despite some slippage in oil prices—we do think the stock could pull in further given the environment, but the odds favor pullbacks likely being buyable as the short- and long-term outlook is growing increasingly positive for offshore drillers. We also like that, unlike many peers, it’s in position to boost shareholder returns, putting it in a similar position as the leading oil explorers a couple of years ago.

On Holding (ONON): ONON was whacked on earnings this week, so it’s not ready for prime time right now—that said, we’re not taking our eyes off of it as the underlying business is sound, and we don’t see the overall chart as a disaster (more of a trading range). It needs work but is still worth keeping an eye on.

Vertiv (VRT): VRT is the rare growth-oriented name that has basically ignored the market, holding all of its huge earnings gap (and huge advance before that). It likely needs time to digest that move, but it’s on our watch list simply because the resilience is too much to ignore in a growth stock environment like this.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, August 24. As always, we’ll send a Special Bulletin should we have any changes before then.