January 5, 2023

WHAT TO DO NOW: Remain defensive. Early January is often marked by crosscurrents, and this year is no different, with a few intriguing rays of light popping up—but the market’s trends are pointed down and there remain far more sinkholes than shooting stars among individual stocks. In the Model Portfolio, we’ve shielded most of our money from harm’s way in recent weeks, but a couple of our names have been getting hit with growth stocks of late. Tonight, we’re forced to sell our half position in Enphase Energy (ENPH), bringing our cash position up to 80%. Details below.

Current Market Environment
A low jobless claims figure, combined with a hawkish Fed minutes yesterday, led to another round of selling in the major indexes and especially growth stocks. As of 12:30 p.m. ET, the Dow is off 365 points while the Nasdaq is down 118 points.

The market has started out the year acting in the same manner it did for much of 2022—relatively poorly, with the major indexes unable to gain any traction, with strength being sold into and with growth stocks underperforming. Our Cabot Tides and Cabot Trend Lines remain bearish, as does our Aggression Index, as defensive stocks continue to attract money.

Now, we will say that early January is often tricky and volatile; after a few weeks of tax-loss selling and holiday trading, the first few days of a New Year typically have a lot of crosscurrents as investors take gains (don’t have to pay taxes until 2024) and otherwise reposition their portfolios. Partly because of that, our Two-Second Indicator is improving—it’s recorded two straight days of sub-40 new lows, and despite today’s selling, the figure as of 12:30 p.m. ET is just 31.

Plus, as we mentioned last week, the Nasdaq saw an intriguing positive divergence in its new low readings when that index retested its low in late December—and those figures are drying up, too.

Moreover, as we spent some time going through charts this past weekend, we are seeing many etching tighter bases of late—you often see stocks tighten up over time in a bear market, with more controlled (less deep and wild) launching pads being formed that indicate the sellers are slowly losing control. We might write about this in next week’s issue, but suffice it to say that it’s encouraging.

Those are all rays of light, but at the end of the day, we need to see the indexes and individual stocks actually go up before we wade too far into the market’s waters—and at this point, we’re still seeing far more stocks hit the skids than ones leaping over resistance. Thus, while we’re keeping our eyes peeled, your best bet is to remain defensive and wait patiently for a powerful turn; we’re staying mostly on the sideline.

Today, in fact, we’re forced to cut bait with Enphase Energy (ENPH), which has been losing ground consistently for a couple of weeks and is showing us a growing loss. That will leave us with around 80% in cash. We’re open to doing a little buying, but we’ll hold firm tonight as we’re not eager to throw money into the meat grinder.

Model Portfolio
Dexcom (DXCM) has now chopped around for basically two months since its big October move—it’s been unable to move higher, but to this point it’s also been finding support where it “should,” holding near its recent lows and its 50-day line. Nothing’s changed with the story or numbers, and we think the stock wants to head higher if the market allows it. Right now, we’re game for owning a small position—hold on if you’re in, and if not, you can start a position in this area. The company will present at the popular JP Morgan healthcare conference next Monday afternoon (January 9), which could be a catalyst if management has any good tidings. BUY A HALF

Enphase Energy (ENPH) started to pull back a few weeks ago, and got hit further when the solar group took on some water—but it’s just kept on sliding even on light-volume holiday trading, all the way to its 200-day line. Yes, we like the story, and we doubt ENPH is about to get gutted another 25% or 30% from here, but (a) we’re hunting for stocks that are growing more resilient over time, not showing fresh weakness, and (b) more importantly, the stock is toying with our loss limit. We do think ENPH could bounce here, maybe on some re-rotation into solar stocks for a few days, so if you want to give it a bit more rope (assuming you have tons of cash), that’s fine. But, while disappointing, we’re going to cut bait on our half position as the persistent weakness and our loss has us taking action to make sure a bad situation doesn’t get worse. SELL

In last week’s issue, we wrote that given the market’s pattern of hitting strong stocks, a shakeout in Halozyme (HALO) couldn’t be ruled out—and sure enough, the sellers came around for the stock in recent days, pulling HALO down to its 50-day line. We’ll see what happens from here, but such action is normal in our book—we’re not going to buy more given the market, and we’re not complacent, but we’re sticking with our position and think you can enter if you’re not yet in. Like Dexcom, this firm will present next week (Tuesday, January 10) at the popular JP Morgan healthcare conference, so we’ll see if there’s any early 2023 outlook given then. BUY A HALF

Wingstop (WING) has been sliding of late as well—we placed it on Hold a couple of weeks ago and our mental stop is right around here, so we’re watching it closely. That said, we do want to give WING a chance, not just because of the fundamental story being back on the track, but because the latest slippage, while tedious, hasn’t changed the look of the long-term chart (light volume, filling the earnings gap, etc.) and there should be support in this area. Of course, if the weakness continues, we won’t just hold and hope, but at this point we’re gritting our teeth. HOLD

Watch List
Academy Sports (ASO): ASO in now four weeks into yet another rest period, with its recent range sitting on top of the prior huge launching pad. We still think this story (a combination of value/share buybacks and cookie-cutter growth prospects) can produce a solid advance when the market rights itself.

Axon Enterprises (AXON): AXON’s dip to the 50-day line is normal thus far, and any strong rebound could lead to a resumption of the post-earnings rally. The long-term growth potential here remains huge for all of its products, especially its cloud-based evidence management and dispatch offerings.

Celsius (CELH): CELH has been losing altitude for the past month on slackening volume. Ideally this will be yet another shallower, more controlled base-building effort that launches a “real” rally—but we’d expect it to find support soon if that’s the case.

Impinj (PI): Impinj is a smaller cap name ($2.8 billion market cap) that doesn’t have a ton of liquidity (~$50 million of volume per day) and has had a big move in recent months—so it wouldn’t be shocking if it fell off. But so far, PI has held relatively firm, still in position to push ahead if the market gets its act together.

Inspire Medical (INSP): INSP has rallied persistently to its old highs, where it’s begun to hesitate—a pullback would be normal here, the shallower the better.

Las Vegas Sands (LVS): LVS remains one of our top ideas, as China’s move to reopen its economy should result in a very powerful turnaround here—and cash flow was already positive (thanks to its popular Singapore property) even with travel scraping rock bottom in China. Shares continue to hit new recovery highs.

Planet Fitness (PLNT): PLNT made a run at multi-month highs this week, but was rejected—even so, shares are still holding up well. It’s not a lightning-fast grower at this point, but 20%-plus annual cash flow and earnings growth are a very good bet for the next few years.

Shift4 (FOUR): FOUR moved above some resistance in the 54 area near year-end, and it’s chopped around since, which is par for the course. Overall, we see a lot of relative strength here—it’s the top name on our watch list and we may nibble even before the market shapes up.

Super Micro Computer (SMCI): SMCI is still hanging around its 50-day line, and there’s little doubt earnings are going to be out of this world during the next few quarters at least. As with everything, we’d like to see the stock stabilize soon or else a deeper retreat could be coming.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, January 12. As always, we’ll send a Special Bulletin should we have any changes before then.