October 12, 2023

WHAT TO DO NOW: Remain cautious. The bounce starting last Friday does come from a nice setup and, encouragingly, has seen more than a few growth stocks perk up, including some to new highs. However, the weight of the evidence remains pointed to the downside, with our Cabot Tides and Two-Second Indicator clearly negative, the vast majority of stocks also in intermediate-term downtrends and interest rates still trending up. We’re taking it one day at a time, but right now, we’re sticking with a big cash position of around 65%—we have no changes in the Model Portfolio tonight.

Current Market Environment

A higher-than-expected inflation report and a poor Treasury auction brought out the sellers today; as of 3:30 p.m. ET, the S&P 500 and Nasdaq were off about 0.6% though broader indexes were off 1% to 2% on the day.

It’s been an encouraging past week for the market on a couple of fronts. The first was the setup, which we mentioned in last week’s issue—we saw some “real” oversold signs, like fewer than 10% of S&P 500 members north of their 50-day lines, along with widespread pessimism on a short- (investor surveys, etc.) and big-picture front. And then came the bounce, which not only saw some indexes move higher, but more important to us, saw some of the resilient stocks pop, with some even moving to new highs—and, even today, most held relatively firm.

We consider this a good first step or two for the market, and especially for growth stocks—with some names acting well and with our Aggression Index clearly positive, growth is positioned to do well if the market really kicks into gear.

That said, we’re not going further than that. Our Cabot Tides remain clearly negative, with broader indexes nowhere close to turning up; even the Nasdaq Composite, which is the strongest index out there, is hitting some resistance near the 50-day line. Our Two-Second Indicator recorded just one sub-40 reading before reversing back up the last two trading sessions. Overall, 75% to 80% of stocks are still stuck south of their 50-day lines, with some areas (go look at medical device names) still being taken apart.

And let’s not forget that the trend of interest rates remains firmly up, with rates quickly bouncing higher today after an inflation report and a poor Treasury auction.

All in all, the story is simple: We’re encouraged by the setup and the action in growth stocks, and if we see some upside follow-through from here, we could start nibbling, adding a little exposure in a couple of peppy names from our watch list.

However, right now, there’s no question that the weight of the evidence remains negative, so we’ll practice some more patience to see if the rally can gain steam. Thus, we’re standing pat tonight with a big 65%-ish cash position.

Model Portfolio

CrowdStrike (CRWD) is certainly acting like a leader should this market upturn morph into the real McCoy, with a straight-up move on solid volume beginning as soon as the pressure came off the market last Friday. (It also doesn’t hurt that peers like Zscaler (ZS) and Palo Alto Networks (PANW) have also been acting well.) Management’s hike of three-to-five-year targets a few weeks back was likely a perception changer, with solid top-line growth expected to result in much higher levels of free cash flow and earnings than previously thought. We’d obviously like to average up, but we’re not eager to push the envelope after the market’s bounced into some resistance. If you’re not yet in, try to start a position on dips of a few points. BUY A HALF

DraftKings (DKNG) is sitting near the middle of its three-month range, with buyers and sellers taking turns pushing the stock around. We’re optimistic the next big move is up as the chart looks normal (the two big-volume up days in late September aren’t decisive, but are encouraging; the RP line isn’t far from new high ground) and the competition fears from ESPN seem to have died down. As usual, we’ll play it by the book—a big lift from here would probably have us restoring our Buy rating and possibly averaging up as well, but with the stock meandering here, we’ll stick with our Hold rating. HOLD HALF

Noble (NE) is trying to stabilize in the upper 40s, but we’ll see how it goes—to this point, the stock doesn’t look awful, but it’s been unable to get off its knees in any real way. We sold one third of our position recently, and if NE continues to struggle, we could dump the rest and look for greener pastures. For now, though, we’re OK giving it a bit of wiggle room. HOLD

ProShares Ultra S&P 500 Fund (SSO) has bounced nicely from its lows last week, but it could only make it back up to the 25-day line before pulling in today. Of course, reading too much into every wiggle is rarely a good idea, especially early in a rally attempt—news-driven action and selling on strength are the norm when in downtrends—but as we wrote in the first section, we’ll need to see more to turn the intermediate-term trend up. We’ll stay on hold. HOLD

Uber (UBER) has perked up with the market and continues to have a series of slightly higher lows (unlike the major indexes), which bodes well. That said, similar to DKNG, it’s sort of in no-man’s land, just gyrating in the middle of the consolidation that began at the end of July. We think the juice is there for another uptrend if/when the market truly gets moving, but at this point we’re just sitting tight and giving the stock room to breathe. Earnings are due November 8. HOLD

Watch List

Axcelis Technologies (ACLS): It’s not pretty, but we’re not writing off ACLS just yet, as the top-to-bottom correction of 24% isn’t at all unreasonable given the huge run this year. Granted, if the stock continues to decline from here, it’s likely to need much more repair work—and have us looking elsewhere. But at this point, the firm’s unique chip equipment for SiC chips should keep earnings and free cash flow growing nicely for a long time to come.

Duolingo (DUOL): DUOL remains wild—its daily range is about 4% from high to low—but also very strong, with numerous big-volume buying days sending the stock to higher highs. We still like the action and the story, though we’d probably limit any position we have to a half-sized stake given the gyrations.

Gitlab (GTLB): GitLab has a unique DevOps platform that, in a nutshell, helps software developers test the code they wrote, merge it into existing code, push it out to users and make sure it’s working as expected. Revenues have been slowing but should crank ahead at 30% rates for at least the next couple of years, and the bottom line is just eking into the black--and the stock has set up a solid three-month pattern.

Nutanix (NTNX): NTNX has leapt to new high ground on great volume this week, a good sign that the September earnings breakout has legs. As we wrote last issue, the combination of an in-demand product and a completed move to a subscription model should produce buoyant sales, earnings and free cash flow growth for many years.

Nvidia (NVDA): NVDA isn’t storming ahead, but it’s eclipsed its 50-day line as it continues its three-month consolidation. Yes, it’s a mega-cap name, but we could take a swing at it given its position as the flag-bearer of the AI movement—and, of course, its ridiculous sales and earnings growth.

Remitly (RELY): RELY was rallying when the market was in trouble, and now it’s pulling in fairly hard as the market bounces—not really what we’re looking for. Still, that’s looking at the short-term; the overall picture is still solid, though we’d like to see the stock hold support around here.

Vertiv (VRT): VRT has moved to new high ground this week, a good sign after showing excellent resilience for the prior month and a half of market weakness. Of course, the massive run earlier this year does raise risk, but there’s no question the buyers are still in control.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, October 19. As always, we’ll send a Special Bulletin should we have any changes before then.