October 13, 2022

WHAT TO DO NOW: Remain cautious. The market had a solid reversal today despite big inflation numbers, which is certainly a step in the right direction—and there’s enough pessimism, bad news and positive divergences (Two-Second Indicator) out there for something to spark on the upside. That said, as we’ve seen repeatedly, one (or even two or three) days doesn’t change the overall picture, with the major trends of the indexes, most sectors and the vast majority pointed down. In the Model Portfolio, we’re sitting tight with our near-80% cash hoard, though we’re also sticking with our three remaining stocks. Details below.

Current Market Environment
The market sold off sharply this morning after another hotter-than-expected inflation report—but, interestingly, the major indexes turned up early on, with the Dow closing up a huge 825 points (2.8%) and the Nasdaq rallying 232 points (2.2%), though individual stocks were far more mixed (though all closed miles off their lows).

On a big-picture basis, there’s not much new to say: The sellers are in control of the major indexes (the trends of the major indexes are clearly down) and the vast majority of stocks (85%-plus are below their 50-day and 200-day lines). Moreover, growth stocks, indexes and funds, many of which were holding up a bit better than the general indexes, have taken it on the chin this week, with some diving to new lows.

Now, today’s upside reversal could prove to be meaningful for a couple of reasons. First, of course, was that it occurred despite another piece of bad news—the first time we’ve seen the market shrug off bad inflation news in a long time.

The second reason comes from our Two-Second Indicator—interestingly, the peak in new lows during this market downleg (which started in late August) came on September 23, three weeks ago, despite the fact that the major indexes clearly moved lower during that time. As we’ve written about previously (including in Growth Investor a few weeks back), the pattern of the broad market holding up a bit better than the indexes amidst a tsunami of bad news is often seen near market lows.

However, now we need to see upside follow-through, both from the indexes and from growth stocks—something that’s been in short supply during 2022.

Until that happens, we’ll have our eyes peeled, but right now is not a time to be a hero: You should be very cautious, with cash being your largest position as we wait patiently for the sellers to run out of ammo. In the Model Portfolio, we did a little nibbling late last week, which obviously isn’t off to a good start, but we’re sticking with all three of our remaining names as well as our 80%-ish cash hoard.

Model Portfolio
Shockwave Medical (SWAV) is still in OK position overall, holding not just miles above its May low (way down near 120!) but also a decent amount above of its late-September low (245 or so) as it etches a seven-week launching pad. We still think SWAV can be a leader should a new advance get underway anytime soon; earnings are due November 7, which will be a catalyst (for good or bad). At this point, we’re happy to sit tight with our position and give it a chance to continue holding up. HOLD

Wingstop (WING) has fallen off since our purchase last Friday—and this morning, we were wondering if we’d have to hit the eject button, but the stock then turned around with everything else. Again, the overall picture here is solid, with WING effectively hacking around in a wide range (110 to 145) during the past two months as the market has imploded, and it stands above not just its May nadir (below 70!) but even its late-August low area (110-ish). If the stock really gives up the ghost, we’ll cut bait, but we’re still optimistic the underlying cookie-cutter story is back on track and the stock can be a leader when the market turns. We’ll keep our Buy a Half rating, but only if you have a lot of cash already on the sideline. BUY A HALF

Wolfspeed (WOLF) is basically a carbon copy of WING in the sense that (a) the stock has certainly come off with the market and growth stocks in recent days, but (b) it’s also generally gyrating in a wide range in recent weeks (even as the market has tanked) and is well above its spring lows, both of which bode well. We’re trying to give this name (and WING) a chance to hold up, so we’re being flexible with our mental stops. Even so, a drop below today’s low would be a red flag (under the 200-day line), but at this point, we’re sticking with WOLF and feel like a couple of good days could make a big difference. We’re OK picking up a few shares here, but once again, only if you’re already highly defensive. BUY A HALF

Watch List
Academy Sports (ASO): ASO has been weighed down a bit by the general market, but it’s still just a few good days away from new high ground. The combination of elevated earnings, the cookie-cutter story, a very low valuation and a big share buyback program should all work in the stock’s favor.

Albemarle (ALB): ALB cracked its 50-day line yesterday, though it found some support near its 200-day line today. Yes, it might be done for a while, but we’re still watching it due because it’s miles above its prior lows and, fundamentally, some measures of lithium pricing (such as carbonate over in China) are still hitting new highs.

Celsius (CELH): CELH continues to correct, but we’re still keeping an eye on it as (a) the pullback certainly isn’t abnormal given the summer run to new highs, and (b) we doubt anything has changed with the underlying story.

Duolingo (DUOL): DUOL has taken on water but remains in a base-building phase (now nearly 14 weeks long) and has mostly avoided any big distribution during that time. It’s a bit thinly traded, but it certainly looks like it wants to head higher if the market can find its footing.

Progeny (PGNY): We wrote about PGNY a couple of issues ago, and the stock is still holding up well—and as a niche health insurer (focused on fertility services), its business should be well insulated from all the shenanigans going on in the world.

Shift4 (FOUR): FOUR is getting tossed around here and there, but it’s now in week nine of a fairly tight structure as it continues to battle with its 200-day line. A couple of good days from here would be intriguing, assuming the market can kick into gear.

Xometry (XMTR): XMTR continues to act just fine (still above its 50-day line) and has a big, new story that should attract more big investors over time.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, October 20. As always, we’ll send a Special Bulletin should we have any changes before then.