WHAT TO DO NOW: Hold some cash and take things on a stock-by-stock basis. The market is getting whacked today as inflation remains higher than expected, which has interest rates rallying sharply and expectations of Fed rate cuts sliding. That said, the trends of most indexes and stocks are still fine, and with 30% in cash coming into today, we’re not overreacting—but we will sell one-third of our Arista Networks (ANET) position, which is one of many tech names getting whacked after a good-not-great quarterly report, while placing PulteGroup (PHM) on Hold. That will leave us with around 33% in cash, which we’ll hang on to as we see how this pullback plays out.
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As of 2:00 am EST, all of the major indexes and the vast majority of stocks are in the red, with the S&P 500 down 1.6% and the Nasdaq off 1.9%.
It didn’t take an expert to know that the market and many leaders were extended in both price (above moving averages and support, etc.) and time (been running for three-plus months), all while most of the market wasn’t doing much and some frothiness appeared. As we’ve written, that meant risk was rising for some sort of change in character in the market.
And it’s possible this morning’s worse-than-expected inflation report was the catalyst, as interest rates are popping again (yields are decisively above their 50-day lines now, so the downtrend is over) and the market and leaders are getting hit hard.
Now, that doesn’t mean it’s suddenly the end of days: Our Cabot Tides and Two-Second indicator are still positive and, despite today’s carnage, most leaders haven’t cracked their overall uptrends. (Some have even found good support so far today.) Thus, we don’t advise suddenly turning defensive or selling wholesale—but after a very good run, we’re taking things on a stock-by-stock basis and remaining selective on the buy side.
That’s why we’ve been holding off most new buying of late and pruning some names, coming into today with around 30% in cash. Thus, at this point, we’re taking things more on a stock-by-stock basis rather than selling for selling’s sake.
In the Model Portfolio, we’re going to sell one-third of Arista Networks (ANET), which is getting hit today after last night’s earnings report. To us, this seems mostly about timing—business is solid and an AI ramp is almost surely coming, but the top brass thinks that could be an early 2025 story (instead of a Q3 or Q4 situation).
It’s possible management is being conservative given that many big spenders (like Meta, Amazon, etc.) are planning on hiking purchases, and right here, the stock is still hanging around its 25-day line, so it’s not a disaster. Even so, we think it’s prudent to lighten up here, take some partial profits and see if the stock can resume its rally going ahead. SELL ONE-THIRD HOLD THE REST
We’re also going to place Pulte Group (PHM) on Hold, as the stock has been softening and is now testing support. We don’t think the retreat in PHM or its peers has been bad at all given the multi-week rally in interest/mortgage rates, and a few good days could turn things around, but we’ll respect the action and go to Hold. HOLD PHM
While those are the only two moves we’re making today, we haven’t forgotten about new buying—if the market and leaders can steady themselves, we could dip our toe into a name or two that’s more recently shown power (like, say, AppFolio (APPF) or Palantir (PLTR), both of which were written about in last week’s issue) or something outside of the AI/networking area (like Lilly (LLY) or Nordisk (NVO)). But let’s see how it goes.
We’ll have more details in this week’s update—which will probably go out tomorrow evening or early Thursday morning. Don’t hesitate to email me directly at mike@cabotwealth.com with any questions.
