October 26, 2023

WHAT TO DO NOW: The market cave-in continues, with some sacred cows and resilient stocks catching up on the downside now. The trend clearly remains down, and while we’re not craving more cash (69% coming into today), have only smaller positions and see some legitimate oversold signs out there, we’re also not going to just hold and hope with things that are caving in. Tonight, then, we’ll sell the rest of our ProShares S&P 500 Fund (SSO) and one-third of what we have left in Uber (UBER), which will leave us with just over three-quarters of the portfolio on the sideline. Details below.

Current Market Environment

The major indexes are getting hit yet again—as of 1 PM EST, the S&P 500 is off 1.1% and the Nasdaq is off another1.8%.

There’s really not much new to say when it comes to the action: The sellers clearly remain in control with the intermediate-term trend of the major indexes clearly down (Cabot Tides), the broad market very down (hundreds of new lows from the Two-Second Indicator each day) and with something like 85% of stocks under their 50-day lines and 70% to 75% under their 200-day lines. And let’s not forget that, while there’s been a bit of hesitation of late, the trend of interest rates is firmly up.

Moreover, we’re now seeing more and more resilient stocks and even sacred cows (META on earnings today, AAPL cracking the 200-day line today, GOOG earnings yesterday) fall apart on earnings or just because of the market’s pull.

Now, there’s a growing chance we’re entering the “it’s so bad it’s good” territory, with more “real” oversold readings—the 10-day new high/new low ratio on the NYSE is south of 10% (more than 90% of all stocks hitting extremes are hitting new lows), which is another oversold-type measure giving an “alert.” Combined with some other things, if/when the market finally rebounds for good, it should result in a sustained move.

However, there’s no reason oversold measures can’t get more oversold (they often do, in fact), which is why we trade based on what’s actually going on in the market. Thus, our main message right now is: Remain cautious, holding plenty of cash and staying very close to shore until this selling storm passes. In the Model Portfolio, we’ve held tons of cash for weeks and came into today with nearly 70% on the sideline—and our remaining five positions are all less than “full-sized” (either half-sized stakes, or we’ve pared back once or twice already).

From here, a lot of the decision-making process comes down to not just the stocks themselves but portfolio management—if you just go by the charts, you would probably sell everything from nearly every portfolio, but the question is whether you want to be 100% in cash. We generally don’t, though we also don’t want to simply hold and hope with names that are cracking.

Tonight, though, we will pare back some more—after having sold two chunks previously, we’re going to sell the rest of our ProShares S&P 500 Fund (SSO), and we’re also going to sell one-third of our remaining position in Uber (UBER).

That will leave us with just over three-quarters of the portfolio in cash. If the market really shows some upside power soon, we could redeploy a bit of that (5% or 15%) into some potential leaders even before we get official green lights from our indicators. For now, though, we’ll hold onto the cash and watch things on a day-by-day basis. Details below.

Model Portfolio

CrowdStrike (CRWD) is one of many resilient stocks that the bears have come around for in recent days, though big picture, the damage has been reasonable—CRWD is still hanging near its 25-day line, which is obviously miles stronger than most everything out there. We continue to think the stock is primed for good things if the market can stabilize; in fact, in a bullish scenario, we could quickly average up if CRWD pops higher as the market turns up in a meaningful way. That said, given the maelstrom out there, we’ll switch our half-sized position to Hold and see how well the stock can continue to hold up. HOLD HALF

DraftKings (DKNG) has also come under the knife, dipping back to its August lows—that’s still stronger than the market (even the S&P 500 is about 5% below its August low), though nobody is going to argue the stock is strong, either. One analyst just upgraded shares this week, saying he expects a very solid Q3 report (due November 2), and the mid-November Analyst Day could bring some medium-term (two- or three-year) forecasts from management about EBITDA and profitability. If you have a full-sized stake, you could consider shaving some off here—but we’ve been riding with a half-sized position for months, so with the stock near some support, we’ll hold today. HOLD HALF

Noble (NE) is also dripping lower, testing the support area we mentioned last week. Again, if we were craving cash, we’d probably dump our shares, but we’ve already sold one-third, the selling seems very controlled (being pulled down by the market rather than getting pounded) and there should be a good amount of support in this area. Fundamentally, of course, we doubt anything’s changed in the offshore sector, with limited supply of rigs, elevated oil prices and majors looking to guarantee long-term output all likely to contribute to a multi-year period in the sun for the sector—and Noble is the leader in the group. We’ll hold our remaining shares for now, though like most everything, we want to see it find some support right quick. HOLD

ProShares Ultra S&P 500 Fund (SSO) has been following the S&P 500 lower, and while we have “only” a small position and there are some legitimate oversold-type signals out there, we simply can’t hold onto a leveraged long index fund in this type of downtrend. Once a sustained move starts, we’re likely to try our hand again with either SSO or a similar fund (maybe small caps, which are near their bear market lows, could be the choice), as having the foot in the door of a “real” bull move is half the battle. But right now we’ll let the rest of our position go and hold the cash. SELL

We could pretty much copy and paste the DraftKings and Noble write-ups and change the name to Uber (UBER), which has clearly taken on water (we sold some when it cracked support a couple of weeks ago) but is now down toward an area of support. We still think the story here is very much intact—management was talking very bullishly just a few weeks ago about the major business lines and newer ventures—but we’re going to trim a bit more given the action, selling one-third of what we have left and holding the rest. SELL ONE-THIRD OF YOUR REMAINING SHARES, HOLD THE REST

Watch List

Elastic (ESTC): ESTC is basically a Big Data firm, with an enterprise search and monitoring platform that’s a hit for a ton of blue-chip names. Growth is solid and earnings are lifting rapidly, all of which is good—but even better growth could come from AI, as a powerful ingest-and-search platform like this (when combined with a proprietary or general machine learnings offering) could be the backbone of many AI efforts. The stock has gotten hit with everything else this week, though it’s still around its 50-day line.

Eli Lilly (LLY): The story here is a bit obvious and the stock’s had a good-sized move, but LLY remains in decent shape and the upside guesstimates of the potential for Mounjaro as a weight-loss treatment continue to be ratcheted up. Earnings are due November 2.

Gitlab (GTLB): While the S&P 500 has notched lower lows in August, early October and this week (4,335—4,216—4,155), GTLB has (so far) held the 42-ish level each time, a solid showing of relative strength. The firm’s software development, testing and integration platform has huge potential, and the numbers (30%-plus revenue growth through 2024, earnings in the black) are great.

Nutanix (NTNX): NTNX took a steep dip but remains above its 50-day line, unlike 85% of stocks out there, and there’s little doubt demand for its offerings will drive recurring revenue and free cash flow nicely higher from here.

Nvidia (NVDA): NVDA took a fall with everything else in recent days, but it’s still trading near its August lows in contrast to the S&P 500. It needs some work, but we continue to think this flag-bearer of the AI movement will be a magnet for institutional money when the market decisively turns up.

Remitly (RELY): RELY is a bit thinly traded and somewhat out of gear with the market; sometimes those kinds of names do well until the market turns, when big investors look elsewhere. Even so, we’re putting more emphasis on the stock’s persistent strength (been above its 50-day line since the early-August earnings report) and unique story (bringing the gigantic remittance sector into the 21^st century). Earnings are out November 8.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, November 2. As always, we’ll send a Special Bulletin should we have any changes before then.