WHAT TO DO NOW: Remain bullish, but take action where needed. The market (and especially growth stocks) have taken a beating in the first two days of the year—there are reasons to believe this is partly due to seasonal shenanigans, so we’re not overreacting, but we’re also not holding and hoping. In the Model Portfolio, we’ll sell half of DraftKings (DKNG), which is our weakest stock, and place Duolingo (DUOL) on Hold, leaving us with around 25% in cash. We do see some potential buys setting up, but we’ll hold the cash for now and see if growth stocks (and the market) can find support.
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Growth (and most other) stocks are getting whacked again today—at day’s end, the S&P 500 was down 0.8%, the Nasdaq was off 1.2% and growth-oriented indexes were off 2.5% to 4%.
We wrote last week that early January is often volatile and tricky, and we’re certainly seeing that, with leading growth stocks getting hit very hard—the question is whether this is more a short-term phenomenon that could reverse in the days ahead … and there are some indications that it could based on historical studies.
(One study (by technician Wayne Whaley; you can follow on Twitter @WayneWhaley1136) said the Nasdaq has fallen at least 0.5% eight other times on the first day of the year after a double-digit gain the prior year—and a week later, it was higher all eight times by an average of 2%. Of course, we’re not super short-term traders, but it’s just a heads up.)
Big picture, while anything is possible, our key market timing indicators are still positive, and the “hyper-overbought” readings seen throughout December generally bode well when looking months down the road. We would say that our Aggression Index (growth stocks vs. defensive stocks) is testing key levels, though that’s about the only fly in the ointment in terms of top-down evidence.
As for individual names, we see a lot of strong (even non-growth) stocks coming down from outer space … but at this point, the vast majority are still in intermediate-term uptrends. At least for now, we advise sticking with these names (assuming no loss limits have been tripped)—but we don’t advise complacency with stuff that’s cracking support.
On that note, we’re going to sell half of DraftKings (DKNG) tomorrow, which stalled out near Thanksgiving and has sliced its 50-day line. The long-term uptrend is intact, and like the market, a bounce is possible, but it’s our weakest stock. SELL HALF
We’re also going to place Duolingo (DUOL) on Hold—we knew a sharp slide was possible/likely at some point from this super-volatile name, and shares are still above their rising 50-day line even after the recent retreat. But we think it’s prudent to go to Hold and see how things shake out. HOLD
The partial sale of DKNG will leave us with around 25% in cash, which we’ll hold onto tonight—though we will say that we think some add-on points could be developing (we’re watching CRWD, for instance), some retreats in extended names (like KKR) are getting tempting and even some new merchandise could be emerging due to rotation into some medical names (LLY may finally be moving; NBIX is another).
We’ll have a full update (and any further changes) tomorrow evening (January 4) in our regularly scheduled update. Don’t hesitate to email me directly at mike@cabotwealth.com with any questions.
