WHAT TO DO NOW: Continue to hold some cash as leadership stocks correct. For the here and now, things are getting trickier, but most leaders aren’t flashing big-picture abnormal action, and our market timing indicators are still positive; thus, we’re still taking things on a stock-by-stock basis while keeping a chunk of cash on the sideline. In the Model Portfolio, because we’ve already built up a 34% cash position, we’re being a bit patient to see how this week’s dip plays out—that said, we are switching CrowdStrike (CRWD), Elastic (ESTC) and Shift4 (FOUR) to Hold ratings and will take it day-to-day from here. Details below.
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As of 2 pm EST, the S&P 500 is down 0.2% and the Nasdaq is off 0.7% but leaders are again getting whacked, with growth indexes down 2% to 3% on the day.
Following last week’s big knock to the market and leading stocks, we saw a solid snapback, but we also said there are almost always reverberations from such a move after a big market advance (and after seeing many yellow flags to the rally in late January/early February). And now we’re seeing that, with more selling among some of the hottest leaders this week.
Now, big picture, not much has changed—our major market timing indicators are in good shape and, even for the leaders that have hit air pockets, few have truly shown big-picture abnormal action. Thus, we’re optimistic that this is more of a normal (but painful) deflating of many extended names (possibly the start of a choppy/tedious few weeks of digestion) as opposed to what we saw repeatedly during 2022-2023 (rallies going completely up in smoke).
Even so, we haven’t been just holding and hoping—through paring back and limiting new buying, we’ve already built up 34% in cash in the Model Portfolio, so we’re still taking things on a stock-by-stock basis.
On that note, CrowdStrike (CRWD), which has been one of the biggest growth stock leaders, is getting hit very hard today, though not because of anything company-specific—instead, peer Palo Alto Networks (PANW) was crushed on earnings and actually cut guidance, which is roiling the entire group today. To be fair, CRWD is still above its 50-day line as we write, and (importantly) sometimes reactions to a peer’s report (good or bad) can be false moves. Even so, there’s no doubt the damage is real.
If you have a good-sized position (whatever that means to you), we advise selling a chunk (maybe between one-quarter and one-third) of your CRWD shares. For us, our position size is smaller than normal (now about 8% of the account); we may still trim the position soon, but we want to see how the stock reacts to today’s selling during the next day or two. HOLD
We’re also going to place both Elastic (ESTC) and our half-sized stake in Shift4 Payments (FOUR) on Hold as well, as both are taking on water. As with CRWD, we could trim or sell outright if the names don’t find support, but we’ll hold tonight and see how things play out day by day.
We’re keeping an eye on everything, of course—we’re not eager at this point to get too defensive (we still think the best leaders could be nicely higher in the months ahead) but if the sellers really dig in, we won’t hesitate to pare back further and hold more cash until things settle down.
We’ll have more details (and possibly some more changes) in this week’s issue, due tomorrow. Don’t hesitate to email me directly at mike@cabotwealth.com with any questions.
