November 4, 2021

The market has had some wobbles after a strong three-week run, and finding good buy points and keeping an eye on earnings reports remains vital. But overall, most of the evidence remains bullish, so we do, too. Most of the stocks we own are acting well, though we’re still wading through earnings season and will react if need be. In the meantime, we’re still aiming to add exposure, and are buying a half-sized position in an old friend tomorrow.

Market Overview, Model Portfolio Update & Watch List

Still Tricky, but Also Still Bullish
We didn’t think 2021—the year of endless rotations, dips, sudden changes in direction and meme-driven moves—would suddenly morph into 1999, where the sellers took the end of the year off and everything you threw a dart at motored higher. And indeed, after a great three-week rally out of the September correction, we’ve started to see a few potholes, with some earnings- or downgrade-related retreats and a few growth stocks being rejected near prior highs.

Moreover, seeing as how the correction lasted only a month and given the quick snapback, we’ve seen a big rebound in investor sentiment, too—while the selloff did prompt many to run to the sidelines, most have quickly returned to their buying ways. We don’t trade based on short-term sentiment moves, but it does raise risk somewhat, opening up the market to hiccups.

All of this is to simply say: The environment for the market (and growth stocks) remains relatively tricky. If you own five stocks, there’s a good chance at least a couple give you a scare every week or two. Thus, picking good entry points and sticking to the system is still vital.

But with that heads-up out of the way, we’re still far more optimistic than not because the evidence is far more bullish than bearish. For the major indexes, both of our trend-following measures are still positive, bolstered by the multi-month breakouts seen of late in the small- and mid-cap indexes. (Frankly, owning a leveraged long index fund for one of those indexes is probably a good bet.) Moreover, some seasonality-related studies point to good things ahead for the major indexes (read more about that later in this issue), while secondary measures like Cabot’s Aggression Index are hitting new highs.

Plus, while growth stocks have gotten a bit choppy, we can’t say we’ve seen much abnormal action—most of those that have wobbled have done so after big runs from their lows in early October, and we’re still seeing far more names in good shape, including a few that are soaring to the heavens.

What To Do Now
In total, then, it’s still a bull market—you don’t want to blindly chase things that are super extended and it’s important to manage stocks through earnings reports, but we continue to aim to put money to work. Tonight, we’re starting a half-sized position in Dexcom (DXCM), which we believe is in the midst of a fresh, sustained advance. Our cash position will be around 18%.

After a very solid three-week stretch that brought many growth stocks back to their old highs (or out to new highs), we’ve now seen a couple of weeks of choppy, pothole-filled action. To us, it’s not surprising and is the reason why we didn’t go whole hog during the past couple of weeks—earnings season (whether caution ahead of the report or a reaction to the report) has dented a few names.

Still, any damage has been reasonable to this point, with most stocks simply pulling back after good runs. We do think the wobbles (and continued spate of earnings reports coming) is a reason not to get fully invested, but until proven otherwise, we remain bullish.

In the Model Portfolio, we’ve had a couple of discouraging moves, including with our most recent buy (CRWD), but again, nothing that makes us believe we’ve seen a major character change. Tonight, we’re going to start a half-sized position in Dexcom (DXCM), leaving us with around 18% in cash.

Model Portfolio Update

Current Recommendations

Ambarella (AMBA)—AMBA will likely report earnings late this month or at the start of December, which is always a risk, especially given the stock’s recent run. However, we’re pleased to see many chip stocks (including those that have exposure to the auto market and electric vehicles, like Ambarella) react well to earnings, and any further announcements of deals with auto makers should help perception. (A deal with Dongfeng Motor Group in China caused the stock to pop in late September.) Moreover, chart-wise, AMBA’s huge blastoff on September 1 usually kicks off uptrends that don’t up and die after just three months. We are open to a shakeout given that shares are extended to the upside (50-day line at 156 but rising fast), but we remain optimistic that both the stock and the firm’s bottom line have only recently kicked off a big uptrend. We’re OK buying a half-sized position on dips of a few points. BUY A HALF

Asana (ASAN)—Software stocks have been a bit of a mixed bag, with some names (both new and old) acting well and others stuck in the mud. But ASAN continues to act just fine, with some sharp volatility of late (one 7- and one 10-point drop during the past two weeks) looking normal in the context of its overall advance. Now, it’s a fact that shares have had a big run since the summer, so we’re not complacent—earnings are due out in a month (December 2) and we’re always on the lookout for abnormal action. But so far, both big investors and insiders (mostly the CEO) are clearly bullish, and we’re open to the possibility that the relatively new cloud workflow management area (which Asana leads, though there are a few other successful players) could be one of the next must-have capabilities given how the work-from-home trend isn’t going away. Long story short, we’re holding on to what we own, though new buyers should either start small or aim to enter on the occasional dip. BUY

Cloudflare (NET)—Cloudflare reports earnings tonight, with analysts looking for $166 million in revenue (up 61%) and a loss of four cents per share—though, given the monstrous upmove last month, it wouldn’t shock us if expectations were meaningfully higher than that. We toyed with taking partial profits ahead of the report, as a pullback of some sort is obviously possible, but we decided to stick with what is our strongest stock (and one of the strongest growth stocks in the entire market) until the sellers are at least able to put up a fight. An outsized retreat on earnings could have us shaving off some shares, but we continue to believe the unique story here and out-of-this-world upside volume after the October low will carry NET higher over time. We’ll stay on Buy but will have updates following tonight’s report if need be. BUY

CrowdStrike (CRWD)—As we mention briefly later in this issue, timing is vital in this environment, especially when it comes to entry points, and there’s little doubt our timing is off so far when it comes to CRWD—two days after we entered, the stock was powering ahead to new highs, but some weakness in growth stocks and an analyst downgrade (which raised the specter of competition and slowing growth) have caused a buyers strike. Fundamentally, we’ll have to see it to believe it when it comes to competition; in the last conference call, management was openly discussing how, while CrowdStrike has 13,000-ish clients now, the best legacy players have around 100,000, implying a massive runway of growth in the years ahead. Plus, the firm’s latest batch of new product announcements should attract new customers and provide plenty of cross-sell opportunities to its client base. That said, we’re not ignoring what the stock has done; the failed breakout wasn’t good to see, and even today’s bounce came on tepid volume compared to the downgrade-inspired retreat. A drop to 250 or below could have us cutting the loss, but tonight we’re going to stay on Buy, believing the weight of the evidence remains tilted to the upside. BUY

Devon Energy (DVN)—DVN is still getting yanked around by oil prices on a day-to-day basis, but the Q3 report left little doubt that the future is bright. In the quarter, the company produced a whopping $1.1 billion of free cash flow (about $1.60 per share), which led to a fixed-plus-variable dividend of 84 cents per share in the quarter (to be paid out December 30), up from 49 cents in Q2. Just as bullish was the early 2022 outlook—at $70 oil and $4 natural gas (both solidly below today’s prices), Devon believes it will earn about $6 per share of free cash flow next year, which would lead to big dividends and, as was announced yesterday, a likely beefy share repurchase program as well ($1 billion authorization, equal to nearly 4% of the outstanding stock). Shares didn’t react much to the news as oil prices have been a bit weak in recent days, but the overall chart looks fine, with the stock holding near its highs even after a big move. With DVN and other peers (like FANG—see Other Stocks of Interest) reporting jaw-dropping cash flow numbers and offering bullish projections and spending discipline, we think investor perception is steadily coming around to the view that the oil group, after years in the doghouse, could be in a sustained rally. Hold on if you own some, and if not, you can enter here or on dips of a couple of points. BUY

Dexcom (DXCM)—Dexcom is a familiar name if you’ve been with us for a while—the company has long been a leader in continuous glucose monitoring systems (CGMs), an industry that has definitely caught on but has tons of growth potential going forward, with just 40% of Type 1 diabetics and half of insulin intensive Type 2 diabetics in the U.S. (and less overseas) currently using a CGM. Competition (mainly from Abbott) and other factors occasionally affects this stock, which has a history of cooling off for a year or more before getting going again (often because of a fresh catalyst). And that seems to be happening now—sales growth has remained solid in the 25% to 30% range, but DXCM began to emerge in June as investors looked ahead toward the launch of its G7 device later this year (in Europe) and likely early next year (in the U.S.). Earnings are expected to lift nearly 30% next year, and the stock reacted well to earnings after a six-week rest. It won’t be the fastest horse, but we think another major uptrend in DXCM is underway—we’ll start with a half-sized position here. BUY A HALF

Dynatrace (DT)—We can’t say DT is completely out of the woods yet, but the stock has done a very good job of bouncing following Q3 results. Helping the cause was likely much of management’s commentary on the conference call, where it again touched on the fact that it’s seeing more and more opportunities as so many big companies need better visibility into all their apps and systems even as they operate in different cloud environments. (The average new client deal has crept up from $90,000 to $105,000 during the past couple of years.) Moreover, among current clients, the top brass sees tons of upside (14 straight quarters of 20%-plus same-customer revenue growth) as they sign up for more modules and have more apps covered by Dynatrace’s platform. Back to the stock, we’re not going to lose money on our trade (cost basis in the 66 area), so if we do see a big batch of fresh selling, that will be our line in the sand. But right now, we’re keeping our optimist’s hat on, thinking the earnings-induced dip was a shakeout. BUY

Floor & Décor (FND)—Floor & Décor is the second of our names that will report earnings tonight. As we’ve written before, a lot of attention will be paid to supply chain and cost issues (earnings are expected to be roughly flat in Q3 and Q4 despite nicely higher revenues) and whether they’re short- or intermediate-term problems. Encouragingly, earnings estimates have been crawling higher in recent days, and the stock certainly seems to be looking ahead to a re-acceleration in the bottom line—FND has rebounded beautifully from its early-October slide, notching new highs on good volume today. A plunge on earnings back to the October lows (call it 115 or so) would look abnormal on the chart, but after so many pullbacks and shakeouts in recent months (FND has struggled through four retreats of 16% to 25% since February!), there’s no reason the buyers can’t stay in control for a while if the Q3 report is pleasing. We’ll stay on Buy but will be on the horn with any changes after the report. BUY

ProShares Ultra S&P 500 Fund (SSO)—The usual caveats apply to the S&P 500, as it’s had an extended overall run and the recent recovery has brought about some jubilant sentiment readings, which often (not always) leads to some near-term rough sledding. But, bigger picture, the odds favor higher prices ahead—as we write later in this issue, a couple of seasonality-related studies (not usually our favorite things, but these look solid) bode well for the next few months, effectively backing the view of our trend-following indicators that the bull market has legs. Encouragingly, other indexes (Russell 2000) are joining the party, emerging from multi-month consolidations that should lead to higher prices. We’re sticking with our Buy rating on SSO, though as with many strong stocks and indexes, some sort of pullback wouldn’t shock us in the days ahead. BUY

Watch List

• Affirm Holdings (AFRM 169): AFRM has seen buying pressures dry up a bit, but the stock remains perched near its highs as earnings approach (November 10). See more below.
• Coinbase (COIN 344): COIN remains very strong, though it still is affected by crypto movements and has earnings on November 9. We like it but aren’t chasing it here.
• Snowflake (SNOW 357): SNOW’s had a low-volume rally to new recovery highs in recent weeks, but there’s still overhead to chew through and earnings out in early December. We like it but want to see a better setup.
• ZoomInfo (ZI 72): ZI might be starting to break through resistance in the 70 area thanks to another fantastic earnings report this week. If it can get moving, we’ll likely take a position. See more later in this issue.

Other Stocks of Interest; One Interesting Seasonality Measure Just Turned Bullish

Affirm Holdings (AFRM 169)—Affirm has been on our watch list for a few weeks and is definitely a hit-or-miss play—we view it as the leading glamour stock in the market, but there’s definitely risk in a couple different places. The big idea here is that Affirm is leading the Buy Now, Pay Later industry that’s attacking the $600 billion-plus online U.S. retail market—the company’s technology does a “soft pull” (doesn’t affect someone’s credit score) of a consumer’s credit history and offers a variety of tailored payment plans (some even with 0% interest, though usually not). The upside for consumers is the ability to spread out payments, and there are no hidden or late fees (a big differentiator with Affirm vs. its competitors), with those who sign up never having to pay more than agreed. And retailers love it as spreading out payments leads to more customers clicking the buy button. Affirm makes a cut of every transaction and on the interest accrued on these “loans,” which leads to another risk: When the economy really softens, Affirm is going to be left holding a lot of iffy loans. Still, the company’s proprietary technology should cut down on bad debt somewhat, and the real story here is the upside as the Buy Now, Pay Later theme booms—Affirm has signed deals (some non-exclusive) with Amazon, Target, Walmart, Delta Vacations, American Airlines, Staples, William Sonoma, Stubhub, Expedia, Priceline and also has a deal with Shopify for its merchants to access it. As for the numbers, they’ve been great, with revenue growth accelerating (57%, 67%, 71% the past three quarters), gross merchandise volume up 106% in Q2 and active merchants (up five-fold to 29,000) and active consumers (up 97% to 7.1 million) lifting hugely … and this was before the Amazon and many other deals kicked in. The stock has made a huge move, and with earnings out on November 10, some sort of shakeout wouldn’t shock us. But barring a complete meltdown, we’re looking to add a small position if we do see some weakness.

Airbnb (ABNB 178)—When you think about the recovery from the pandemic, most sectors have had their moves as business has recovered, yet most travel names remain stuck in the mud. That doesn’t mean we’re going to go recommend some iffy airline, of course, but Airbnb intrigues for a few reasons. First, of course, is the stock’s dominance—while anyone can list their house for rent, there’s no question that Airbnb is the leading player in the field with north of four million “hosts” around the globe on its platform. Second is the fact that, despite a ton of macro headwinds, the firm’s recovery has been impressive—nights booked in Q2 were actually flat from that of 2019 (pre-pandemic) while revenues were up 10%, gross booking value was up 37% and free cash flow was north of $1 per share. And third, while fears of another virus variant are always floating around, Airbnb’s fastest-growing segment is in longer-term stays (including 28 days or more), something that many are turning to to get out of Dodge with their families. Thus, you have a situation where business will surely grow thanks to travel recovery (analysts see sales up 25% next year and a full-year profit of 66 cents per share, both of which should prove too low), but there’s also a real growth angle here as Airbnb signs up more hosts and expands all over the world. The stock came public last December, had a decent first few months but has gone on to etch a long, deep launching pad, which isn’t unusual for a high-profile IPO. More recently ABNB has tightened up and popped nicely today, which is constructive. Earnings are due out tonight (November 4)—a powerful gap up would probably signal a sustained uptrend is getting underway.

Diamondback Energy (FANG 113)—We think Devon Energy is the leading energy explorer out there, but if you run a less concentrated portfolio, there’s no reason you can’t own a couple of names in the group, and some earnings reports this week have revealed ridiculous cash flow outlooks going forward. Take Diamondback Energy, which is probably our favorite oil name outside DVN and one you can consider if you want more exposure: Q3 results were amazing, with free cash flow (cash flow less all CapEx) of $4 per share, another dividend hike (its third of the year; yield now 1.8%) and further debt reduction ($1.3 billion worth since March; no debt maturities for three years) as output came in a bit above expectations. But all of that pales in comparison to what’s possible in 2022 and beyond—the top brass believes it can keep output level with relatively tame CapEx (breakeven oil price around $32!), and that should lead to ridiculous results, with nearly $13 of free cash flow per share even if oil slips to $60 per barrel, and a ridiculous $19 per share if oil averages $80 (a bit below the current price). And shareholders will see half of whatever the total is paid back in dividends and share buybacks (with the rest slashing debt even further). Translation: Even if oil slips somewhat, Diamondback is likely to pay out a few percent in dividends and buy back a few percent of the company, starting in Q4. Just as important is the stock action—FANG enjoyed four straight weeks of heavy-volume buying in September when the group kicked into gear, tightened up nicely in October and is starting to perk up again. Barring a collapse in oil prices, FANG’s path of least resistance should remain up.

One Interesting Seasonality Measure Just Turned Bullish
We very much adhere to the KISS methodology (Keep It Simple, Stupid) when it comes to much of our system—we’ve found that if you go down the rabbit hole in search of arcane and tertiary indicators and data, you almost always find yourself way off the mark. Usually, the simpler, straightforward, rubber-meets-the-road measures like trend, price and volume provide much better results.

That said, it’s a fact that the market isn’t a kid’s game, either—if you try to make it too simple, you’ll also get burned. That’s one reason why we’ve never been big fans of seasonal investing, or the idea that the calendar itself tells you high-odds times of when to buy or sell. Simply put, if investing were as easy as looking at your calendar, we’d all be rich, but unfortunately that’s not how the world works.

That said, there is one way we do like to use seasonal investing, and it’s to see when the market isn’t doing what it “should” do. Some of this can be anecdotal—for instance, most know that the market tends to do well around holidays, especially into year-end, so on the rare occasion that the indexes sell off hard after Santa has come, it’s usually a tell as to the underlying market’s weakness.

However, a couple of these seasonal measures are real indicators … and they just flashed green last week. One revolves around the notion of the best and worst six-month periods. Generally speaking, most of the market’s net gains over time have come from November through April, while the other six months (May through October) is often where you’ll find some harrowing declines.

Again, we’re not huge fans of the best/worst six-month strategy, as an average over many decades tell you little about what’s going to happen this year. But there is one study that is very impressive—and again, it involves when the market doesn’t do what it should.

The data comes from Wayne Whaley, a sharp technician/student of the market (editor of the Wayne Whaley Market Commentary Studies) and concerns how the market does during what he defines as the worst six-month period (technically May 5 through October 27). It turns out that it’s relatively rare for the market to rally 5% during that period—from 1950 to 2020, such gains occurred just 20 times.

But they almost always portended good things for the “best six-month” period that followed—in fact, the S&P 500 rose every single time during the ensuing six-month stretch, and by an average of nearly 11%! That’s significant because it just happened this year, with the S&P gaining more than 9% during Whaley’s worst-six-month stretch. So, history tells us the major indexes should enjoy further gains through April.

Another (somewhat related) seasonal tidbit came from Ryan Detrick of LPL Financial (give him a follow on Twitter @RyanDetrick). It turns out 2021 is just the ninth time the S&P came into November up at least 20% on the year; of the prior eight times that happened, the S&P rose every single time during the rest of the year, and by an average of 6%.

As always, there are no guarantees in the market, and we’ll be listening to our market timing indicators and the action of leading growth stocks for any sign the sellers are taking control. But these two unusual, calendar-based studies back up the view that this bull market has further to run.

Timing is Everything
There’s no question that, over time, it’s the fundamentals that entice big investors to build big positions in leading stocks, which in turn drives the price much higher over time. But where many investors get tripped up is they fail to incorporate what Jesse Livermore called the “time element”—sales and earnings growth are vital, but so too is getting onboard when demand is overwhelming supply.

For instance, we may have been too eager when we added CrowdStrike (CRWD)—shares looked primed to breakout (shares powered ahead last Tuesday before growth stocks got hit), but now shares have sagged back into their recent up-and-down period, partially due to a recent analyst downgrade. (We wrote more about that earlier in this issue.) The stock isn’t broken (we still rate it Buy), but at least so far, our timing has been off.

Usually, it’s better to wait for a stock to declare itself on the upside, especially if it’s a newer issue. ZoomInfo (ZI), for instance, is a name we’ve been watching for months—it has rapid growth (revenues up 60% in Q3), big earnings and free cash flow and a long-term growth story (a must-have solution for sales reps) that should persist for years. But we’ve been waiting for the stock to get moving: ZI looked like it was breaking out in August from a big post-IPO base but has spent the last three months etching another rest period under 70.

But now it’s testing those highs after earnings this week—with plenty of volatility. Fundamentally, we think ZI has all the characteristics of a winner and is high on our watch list, but we’re waiting for the timing element to be there. WATCH

Cabot Market Timing Indicators

The rally from the early-October lows remains intact, and while there have been some wobbles on earnings- or downgrade-related news, our indicators and most stocks are in good shape. It’s important to pick your stocks and buy points carefully, but this remains a bull market.

Cabot Trend Lines: Bullish
Our Cabot Trend Lines are still in good shape 17 months after their last signal (a Buy back in June 2020)—at the close of last week both of the popular big-cap indexes stood well north of their respective 35-week moving averages (by more than 7% for the S&P 500 and over 8% for the Nasdaq). At some point, the bears will take control of the market, but right now, there’s no question the longer-term trend is pointed up.

Cabot Tides: Bullish
Our Cabot Tides are also positive, and we’re seeing things broaden out—the S&P 600 SmallCap (shown here) has finally let loose this week, lifting out of a nine-month range. (Mid caps have done something similar of late.) With all five indexes nicely above their lower moving average, the intermediate-term trend is clearly up.

Cabot Real Money Index: Neutral
As the market has perked up, investors have poured money into equity funds and ETFs in a hurry—our Real Money Index has quickly rebounded toward multi-month highs (not ideal) and is likely to head higher this week given that it’s dropping off a big outflow five weeks ago. We wouldn’t trade on this yet, but the quick spike in enthusiasm could lead to some tricky trading in the near term.

Charts courtesy of StockCharts.com