WHAT TO DO NOW: Remain bullish, but weed your garden if you have some laggards. The primary evidence is still bullish and most leading stocks look fine, but there are some yellow flags emerging under the market’s hood. We’re still following the main trend, but today we’re going to sell two small positions that are struggling—Duolingo (DUOL) and ProShares Russell 2000 Fund (UWM), leaving us with around 31% in cash. We could put some of that cash to work if things settle down, but right now we’ll hold onto it and see how things shake out. Details below
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As of 10:30 am EST, major indexes are down this morning, with the S&P 500 and Nasdaq both off around 0.7%, but the story is again the broad market, which is off nearly 2%.
A lot of what we wrote about the market two weeks ago holds true today—just more so. When looking at the primary evidence—the intermediate-term trend of most major indexes and the action of leading growth stocks—it remains bullish, with lots of leading names surging in recent days to new highs, and with big-cap indexes doing the same.
However, below the surface, things are getting very divergent—broader indexes are flat to down so far in 2024, and now the sellers are beginning to take a bite out of more and more of the broad market. Indeed, new lows have begun picking up again, and the intermediate-term trend of interest rates appears to be cracking (though it’s not decisive quite yet).
Of course, those broad market and interest rate wobbles don’t guarantee anything; when you combine them with some signs of exuberance (lots of gaps up in leaders, very extended to the upside after three months of running), the risk of either a market retreat and/or a sharp rotation is growing.
We have 23% cash in the Model Portfolio, so we’re not necessarily craving cash, but we think now is a good time to take things on a stock-by-stock basis and weed your garden. For our part, we’re going to sell our small positions in both Duolingo (DUOL), which hasn’t been able to get off its knees despite a sharp correction, as well as our half-sized stake in ProShares Russell 2000 Fund (UWM), which is back near its lows (and below its 50-day line) after a promising bounce.
Those two sales will leave us with around 31% in cash, which we’ll hang onto.
To be clear, when it comes to leaders, we’re impressed with the number of strong earnings reactions we’re still seeing out there, including many on humongous volume—so if things settle down, we have a growing number of names we could start positions in. For now, though, we’ll hold the cash and see how things shake out.
We’ll have more details in Thursday’s issue. Don’t hesitate to email me directly at mike@cabotwealth.com with any questions.
