January 4, 2024

Heads up: I’ll be doing a webinar on Thursday, January 18 (two weeks from today) where I’ll be talking about the market outlook for 2024 and, of course, some stocks I think can help lead the way. Best of all, it’s FREE—we’ll likely be shooting out sign-up information in the days to come.

WHAT TO DO NOW: Continue to lean bullish, but let’s see how this growth stock selling wave progresses. The top-down evidence remains in fine shape when it comes to the overall market, and most growth stocks have fallen off this week, but done so normally (while a few others may be trying to emerge). Thus, we’re giving names some rope, but we’re not tolerating any intermediate-term breaks. In yesterday’s special bulletin, we sold half of DraftKings (DKNG) and placed Duolingo (DUOL) on Hold, leaving us with 27% in cash. We’ll stand pat tonight, though are watching things closely and will be in touch if we have any more changes in the days ahead.

Current Market Environment

The market is relatively quiet today though growth stocks are still having trouble getting any upside momentum. As of 3 pm EST, the S&P 500 was flat while the Nasdaq was off 0.3%.

It’s been a sour new year thus far for the market in general, but especially for growth stocks—in just three days of trading, not only is the Nasdaq down 3.1%, but things like the Renaissance IPO Fund (IPO, down 6.3%), the ARK fund (ARKK, down 6.2%) and the IBD 50 Index of growth stocks (down 3.9% in the first two days; it updates after the close) have been hit very hard.

At this point, nearly all of the top-down evidence remains in fine shape, including our Trend Lines, Tides and Two-Second Indicator. Plus, most leaders are still in decent shape on an intermediate-term basis (above 50-day lines, no gigantic selling volume, etc.)—including some that are approaching higher-odds entry or add-on points and others that are actually perking up. Throw in the fact that there’s a good chance a chunk of the selling is based on outside factors (tax-related profit taking with the new year, etc., etc.), and we’re not panicking.

That said, the sharp rotation out of growth (along with our Aggression Index, which is relatively iffy here) has led to some painful rug pulls during the past couple of years, which is certainly on our mind.

Put it all together, and we’re giving stocks rope here given January’s history of early wobbles, but we’re not going to ignore things that crack support—in yesterday’s bulletin, we sold half of DraftKings (DKNG), which dove below its 50-day line before today’s bounce, while placing Duolingo (DUOL) on Hold.

We’ll stand pat tonight but are keeping a close eye on everything—we could have some moves (both sell and buy) in the days ahead.

Model Portfolio

Arista Networks (ANET) has pulled back with everything else but has yet to close below its 25-day line, which is a sign of strength. A drop all the way to 210 or so would be a yellow (or red) flag, which would likely correspond with a broad growth stock selloff. Still, so far, the action has been reasonable, and the overall story and numbers are sound. Hold on if you own it, and if not, we’re OK grabbing some shares here. BUY

CrowdStrike (CRWD) has finally hit a pothole with the market, though the damage hasn’t been too bad (just a bit below the 25-day line). Frankly, we’d like to use a period of reasonable weakness to average up, and we may do so—but for the moment, we want to see how this New Year’s selloff plays out. The 50-day line is still down at 221 (and rising), so there could be more room to consolidate. If you don’t own any, we’re OK grabbing some on this dip. BUY A HALF

DraftKings (DKNG) had a great-looking, earnings-induced breakout in October and enjoyed a decent run for about a month after that—but then it ran into trouble, and this week’s selling cracked the 50-day line and brought shares back to where they were in August. (To be fair, the Nasdaq was just 1% above its summer highs yesterday, so there’s a lot of this going around.) Today’s rebound was encouraging; DKNG has a history of being herky-jerky and the story is outstanding, so we’re willing to hold on to what we have left and see if a fresh rally can come. SOLD HALF, HOLDING THE REST

Duolingo (DUOL) has sunk sharply on no news, tagging its 50-day line yesterday and today. On one hand, this type of decline isn’t abnormal for the stock, based both on the chart and DUOL’s own history (many 20%-plus declines last year; it moves an average of nine points per day). A strong rebound from here would be encouraging, but we thought it was prudent to move to Hold in yesterday’s bulletin—while we can tolerate a dip slightly below the 50-day line, we’re not going to let the position melt away into a big loss. So far, it’s acceptable, but we want to see buyers emerge soon. HOLD

Elastic (ESTC) has also fallen hard, but it’s far from the worst we’ve seen this week given the size of the stock’s earnings move. We may go to Hold if the stock doesn’t find support soon, but right here we’ll stay on Buy, thinking buying the dip will pay off. BUY A HALF

Nutanix’s (NTNX) dip has come on a couple of days of big volume, which isn’t ideal, but following a move from 35 to 48, the recent dip to 45 seems more than reasonable so far. As with most stocks, a meetup with the rising 50-day line (now near 44) seems possible if this growth stock downturn continues, but we’re thinking optimistically that the dip will prove buyable. BUY

ProShares Russell 2000 Fund (UWM) is off to a rocky start, of course, though that’s a reason we started with a half-sized stake. Maybe the entire market rally fails and the bullish market timing indicators (and hyper-overbought measures written about last week) do the same—and if so, we’ll cut the loss on the small position. But right here, let’s see how it goes: A near-term shake-the-tree event wasn’t a total surprise, now let’s see if UWM (and the market in general) can resume their major upmove. If you didn’t buy any last week, we’re OK with a small position here. BUY A HALF

Essentially everything that was strong coming into the new year has sold off, and that goes for bonds, too—the 10-year Treasury yield is up 14 basis points in three days. Even so, PulteGroup (PHM) is still in solid shape, above its 25-day line as the big dip in mortgage rates (they’re actually about level with the year-ago level!) and still-strong economy should goose demand in the months ahead (including during the key spring selling season in many key locations). Hold if you’re already in, and if not, you can start a position here or on dips of a couple more points. BUY

Uber (UBER) is in the camp of stocks like NTNX—the drop this week has drawn some blood, but given the prior upmove (40 to 63, now down to 58), or even from the breakout (49 to 63 down to 58), it seems reasonable thus far. With the 50-day line around 55, we’d expect support to arrive soon if all is well—if not, we’ll take defensive measures, but right now the evidence tells us the path of least resistance remains up. BUY

Watch List

Cloudflare (NET): Maybe this week’s sharp decline (7% so far) means NET’s November-December run is failing—but we’re not going there yet, with very consistent 30%-ish growth and lifting earnings likely to keep big investors interested. Big picture, Cloudflare does have emerging blue-chip type of potential.

KKR (KKR): KKR is in the third week of a normal pullback after a very strong seven-week run. If the market keels over, all bets are off, but given the longer-term positives, our guess is this retreat will give way to higher prices.

Eli Lilly (LLY) and Novo Nordisk (NVO): It does look like both of these weight-loss-centric stocks were playing possum during the past month or so of 2023, with each moving nicely higher so far in the new year. As with stocks that have pulled in, we do want to see if the moves can be held, but we’re intrigued.

Expedia (EXPE): EXPE is finally pulling back with everything, and it’s still high on our list—though, frankly, a bit more time in this rest period would be nice to see (the 50-day line is down at 131 and rising). Anything is possible, but it would be unusual for a stock to up and die after the super-powerful buying power seen in November and given Expedia’s bullish numbers.

Nvidia (NVDA): NVDA is in the LLY/NVO camp—yes, it may be months into a topping process, but it also may be setting up for a new move, as it was the flag-bearer of the growth stock bull move last spring and the numbers and growth outlook are out of this world.

Shift4 (FOUR): FOUR’s low-volume dip to the 25-day line here looks normal to us; in fact, it may be putting the finishing touches on a giant nine-month consolidation. The M&A rumors that surfaced last month obviously don’t hurt, though we’re just as interested in any updates regarding the firm’s newer sports deals announced in November/December (expansion with the Orlando Magic; Miami Dolphins and Hard Rock Stadium; Baltimore Ravens and M&T Bank Stadium) and how they and others ramp in 2024.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, January 11. As always, we’ll send a Special Bulletin should we have any changes before then.