May 25, 2023

WHAT TO DO NOW: Remain cautious but stay tuned. The market remains very narrow, with a few powerful stocks but the vast, vast majority of names either in no man’s land or acting poorly. For potential leaders, we see many that had been perking up before running into a wall this week—but not (yet) selling off abnormally. If these names can hold soon and resume their upmoves, we’ll like to add at least a couple (maybe more) to the Model Portfolio. Tonight, though, given the extreme narrowness of the advance, we’ll grit our teeth and sit tight, holding about three-quarters in cash and see if these potential leaders can get moving.

Current Market Environment

The big-cap indexes were up today, but that masked some serious weakness under the hood. As of 3 pm, the S&P 500 was up 0.8% and the Nasdaq was was up 1.5%, but breadth was horrible (more than 2-to-1 negative on both exchanges) while broader indexes were all down.

This remains a very interesting and split market environment. Nvidia’s (NVDA) fantastic quarterly report supercharged the big-cap Nasdaq today, and there’s no doubt many names (whether big-cap tech or not) are acting better. Our Cabot Trend Lines remain bullish, and we’re now seeing some longer-term moving averages tilt up on the S&P 500 and Nasdaq, which, after a big fall, is usually very bullish. We’d also say that the recent drop in defensive sectors (XLP, but also XLU and XLV) is a small positive, too.

However, there’s also no doubt that the vast majority of the market is in the garbage bin—more than 60% of NYSE and Nasdaq stocks are south of their 200-day lines even as the big-cap indexes recently tested multi-month highs; as of 3 pm, today’s “rally” saw a 31/134 split of new highs/new lows on the NYSE and a 64/177 split on the Nasdaq; and even most big-caps are struggling, with the equal-weight S&P 500 (symbol RSP) and NYSE Composites each hitting fresh two-month lows today before bouncing a bit this afternoon. We’d also note financial stocks seem to be fading once again after running into resistance.

More important is the fact that our Cabot Tides are actually getting close to turning outright negative despite the latest rally (NYSE Composite, S&P 400 MidCap and S&P 600 SmallCap all are sagging) while our Two-Second Indicator remains solidly negative.

As for potential leaders, there are obviously a few AI-type stocks acting well, but beyond that, what we’re seeing is this: Most names once again ran into a wall this week after some positive action … though the pullbacks to this point have been reasonable. Thus, the question to us is whether (a) this retreat gets worse, keeping us in the meat grinder environment, or (b) whether these pullbacks find support soon and ramp up again, which would be a change in character.

All of that leads us to our game plan: Given the weak overall environment, we’re going to stand pat tonight and hold a big cash position of around three-quarters of the portfolio. However, if the names on our watch list can stabilize and resume their recent upmoves (and if the broad market isn’t collapsing) we’ll likely add exposure in the days ahead.

To be clear, we’d very much like to get more heavily invested if more stocks shake off the one-step-forward, one-step-back type of action. But at the moment, we think it’s best to wait at least a couple more days to see if that pattern changes—if so, it would be a very good sign.

Model Portfolio

Academy Sports & Outdoors (ASO) was cut loose the day after our issue last week, as a horrid quarterly report from sports retailer Foot Locker (FL) caused the stock to hit lower lows. Interestingly, a closer peer (Dick’s Sporting Goods, DKS) reported “good” earnings this week, but that hasn’t stopped the slide, with ASO closing the last few days below its 200-day line. Academy has its own report due June 6, so maybe that will somehow turn the tables, but at this point, a normal retreat has clearly morphed into a downtrend, and it doesn’t help that retail names have generally been weak. We sold and are holding the cash. SOLD

ProShares Ultra S&P 500 Fund (SSO) tested resistance last week and was quickly rejected, which is par for the course in this environment. That said, it’s also “only” back into the area it was for the prior few weeks, so at this point, nothing’s changed. As alluded to in the intro, on a longer-term basis, we’re seeing some very encouraging signs—according to David Cox of Raymond James, the S&P’s 200-day line has risen by 1% after hitting a new 52-week low. Going back all the way to 1933 (!), the index was higher a year later all 20 prior occurrences by an average of more than 14%. Like most studies, this isn’t any major blastoff signal, though we take it as a positive sign. Our plan here remains the same: With SSO in a range, we’ll hold on, but if the index can get moving and some other measures (especially our Cabot Tides) confirm it, we’d likely add some shares. HOLD

Shift4 Payments (FOUR) made a nice comeback, but the sell-on-strength bugaboo arose, with shares falling back some the past two days. Maybe FOUR is set up for another leg down, but like most things, it’s still confined to its trading range and volume has been very light. (We will say the near-term breakdowns of names like Visa and MasterCard are a bit of a yellow flag.) The economy is the ever-present concern, especially if the debt ceiling talks go sideways (potentially killing consumer confidence and spending), but as of the quarterly report earlier this month, there was no sign of that. We’ll continue to be patient with our small position, giving FOUR a chance to resume the uptrend is started late last year. A push back above 69 or so would be very encouraging, but we’ll have to see if that happens. HOLD

We’re thinking the third time is the charm with Uber (UBER xx), whose story has remained in great shape for many quarters and the stock has shown great power on earnings. Like many names outside of chip stocks, UBER is a bit sloppy this week, but volume’s been light, and the stock should be entering an area of support. We started a half-sized position last week; hold if you own some and we’re OK entering here if you didn’t. BUY A HALF

Wingstop (WING) has made good progress for us over time, but there have been plenty of fits and starts and right now the stock is in the midst of a three-plus week retreat—so far, it’s been mild, with shares still a few points above the 50-day line (near 193 and rising), but we’re keeping our eyes open just in case. Interestingly, while many growth-oriented retail-related names have hit the skids, a few restaurants are still looking good, including institutional favorite Chipotle (CMG), which we take as a small plus. All in all, we’re OK holding WING here, giving it some (but not unlimited) rope as it digests its prior upmove. HOLD

Watch List

Axcelis Technologies (ACLS): ACLS popped today with all chip stocks, though it’s not tied to the AI theme—that said, the SiC theme, so to speak, should also be huge, with the production ramp in those chips (for EVs, but also other power-hungry devices) being sustained for many years. And Axcelis’ equipment offers the lowest-risk way for fabs to boost that output. We like ACLS but are aiming for dips at this point.

Celsius (CELH): CELH broke out on the upside after earnings two weeks ago—and, just as important, it’s held up since then, with the recent slippage totally normal. While the original growth story helped the stock do spectacularly well in the last bull move, the Pepsi distribution deal is clearly another leg of the growth story that big investors are discounting.

DoubleVerify (DV): DV isn’t quite up and out of its consolidation, but we’re impressed with its comeback after the short-induced shakeout three weeks ago. The firm seems like a classic follow-on play to the boom in digital advertising and programmatic ad buying, with ad verification services in big demand for connected TV, streaming and social channels.

DraftKings (DKNG): DKNG is a rare lower-priced name that’s on the comeback trail. Volatility is very high percentage-wise (23 to 26 to 23.5 in five days recently!), but growth remains excellent, and, more important, cash flow is about to turn up. If it can settle down a bit we could take a swing at it, with the stock’s “reality” phase likely to go far given its leadership position.

Duolingo (DUOL): DUOL continues to impress following its shake-and-snap action a couple of weeks back. Our only issue here is the wildness of the stocks, which in this environment, has led to the inevitable air pocket eventually. Even so, we’re intrigued by the story, numbers (including the positive free cash flow) and chart, along with the growing sponsorship.

HubSpot (HUBS): HUBS is more calm, cool and collected (and higher priced) than many other names we’re watching—which is a good thing in our book. The firm remains a standout in its sector, with a marketing platform that remains in demand and, importantly, a management team that’s focused on the bottom line.

Inspire Medical (INSP): INSP took a hit earlier this week, but after the recent run, we think the action was very normal—more like a trend knockout rather than a major change in character. The stock does trade around $100 million per day, funds are steadily buying in and it’s looking like this breakout could be the real deal after numerous false starts since late 2021. We like it.

Monday.com (MNDY): Monday.com is an Israeli software firm that’s in the work management space, similar to old friend Asana (ASAN). However, this firm seems to have something special, with a platform that allows most workers (not IT staffs) to build their own workflow solutions for projects and teams—without code. Growth has been fantastic, and while there may be some near-term slowing with the economy, profits are ramping right quick.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, June 1. As always, we’ll send a Special Bulletin should we have any changes before then.