September 28, 2023

WHAT TO DO NOW: Remain cautious, as there’s not much change with our indicators or stance—the intermediate-term trend of most stocks, sectors and indexes is down, and while sentiment is very bearish and a decent number of growth stocks are holding well, it’s best to stay close to shore until the buyers return. Yesterday, we sold one-third of our remaining position in ProShares S&P 500 Fund (SSO) and are now holding about 55% in cash.

Current Market Environment

The market is staging a modest bounce today, with the S&P 500 up 0.5% and the Nasdaq up 0.7% as of 3 pm EST.

The upside breakout in interest rates last week caused the market’s rally attempt to decisively fail, and we’ve generally seen follow-through selling in both bonds (higher rates) and stocks (lower prices) since then, though there’s been a bit of support showing up the past two days.

Even so, at this point, the story is mostly the same: The correction remains in force, with the intermediate-term trend of the major indexes and most stocks (77% south of their 50-day lines) pointed down. Our Two-Second Indicator is also clearly negative, with triple-digit readings the norm during the past couple of weeks and with the figures accelerating higher during the latest selloff.

Longer term, there remain positives, with our Cabot Trend Lines still bullish and sentiment in the dumps (Example: This morning’s AAII weekly survey saw the fewest bulls and most bears since May), which isn’t surprising as most of the worries out there (interest rates first and foremost, but also fears of a government shutdown and reverberations of the auto strike) are very well known.

Plus, while there’s definitely been damage, there are many “normal” looking growth stocks out there—meaning they’ve been hit, but aren’t completely imploding like other major declines (like, say, what was seen a couple different times in 2022), at least to this point.

Thus, we still see a chance the market can carve out a low in the weeks ahead and start the sustained uptrend we’ve been looking for, especially if Treasury rates can pull in a decent amount. But overall, we focus most of our attention on what’s actually happening right now—and with most everything trending lower, having plenty of cash and mostly modest positions makes sense … all while keeping our watch list up to date should the buyers reappear in a big way.

In a special bulletin yesterday, we again trimmed our ProShares S&P 500 (SSO) by selling a third of what we had left, which leaves us with a cash position of about 55%. We’re not aiming to get more defensive from here but will do so if the selling continues. Right now, though, our remaining positions are acting resiliently and/or holding support, so we have no further changes tonight.

Model Portfolio

Celsius (CELH) had two decisive down days last week that definitely damaged the intermediate-term trend and, depending on the market, could affect big-picture investor sentiment. But we’re not going there quite yet—this is a one-of-a-kind growth story that, if all remains as strong as it seems, should attract more support buying if the market can stabilize. At this point, we have a small-ish position, so we’re willing to give the stock some near-term rope, though we won’t sit around if another round of big selling pressure appears. HOLD

CrowdStrike (CRWD) hasn’t been immune from the market’s weakness, being yanked back down to the high area of its prior consolidation, though at this point it certainly seems like the stock is willing to go higher if the market can get out of its own way. Business-wise, everything seems on track, with management’s big bump to its various margin targets a sign that the booming earnings and free cash flow of recent quarters should continue for a long time while annualized recurring revenue continues to plow ahead. We’re obviously not big on buying a ton in this environment, but if you’re not in, we’re OK grabbing a few CRWD shares around here. BUY A HALF

DraftKings (DKNG) was hit hard with most everything last week, though its low was solidly above its August bottom (by nearly two points) and it saw two good-volume buying days before today’s dip. Fundamentally, the firm inked a deal with a partner to launch online sports betting in Kentucky, which obviously isn’t the most populous state but doesn’t hurt the cause. As with everything else, we’ll see how it goes, but our guess is that the stock’s decision point will come soon—if the recent drop continues down to the prior (ESPN-induced) lows, it’s likely a sign that investor perception is falling as competition fears increase, which would probably have us looking for greener pastures. However, right now, we’re optimistic the stock is etching a normal launching pad as big investors look ahead toward buoyant sales and EBITDA growth. HOLD HALF

Noble (NE) has been hovering in the 49 to 54 area since the market topped in mid-July, and Tuesday’s big-volume support near 50 was encouraging—though, again, the fact that the stock isn’t moving up even as oil prices remain elevated is something to watch. (What happens if oil prices fall back $5 to $10, etc.?) If shares weaken much from here, we could sell a portion of our stake, but we’re trying to give NE room to maneuver as the big picture here (years of downtimes in offshore drilling leading to limited supply, buoyant dayrates and growing shareholder payouts) is very much lined up on the upside. Hold for now. HOLD

We decided to trim a bit more of our ProShares Ultra S&P 500 Fund (SSO) position yesterday to respect what’s going on in the market and with our indicators. Today’s oversold bounce was certainly welcome, but we need to see a lot more to conclude the intermediate-term trend is turning back up. Overall, the S&P’s 8.5% correction from high to low isn’t the end of the world, so we’re OK seeing how things go from here with SSO now that we’ve pared back, but we’d like to see this bounce get some traction. SOLD ANOTHER THIRD, HOLDING THE REST

Uber (UBER xx) nosedived last Thursday with the market and bonds, but held near 44 (a point above its August low, even as all major indexes have sunk beneath the August low) and, today, pushed a smidge back above its 50-day line—both solid signs of relative strength. Of course, that doesn’t guarantee anything if the market remains weak, but it’s a sign that Uber wants to head higher once the pressure comes off the market. The top brass spoke today at a conference, relaying that they remained focused on profitability (free cash flow, EBITDA, etc.) and want to become a “super app” of sorts, entering travel-related products (in the U.K., where this is being tested, it’s moved into booking some flights, trains and busses with good success) given that so many users book rides outside of their home areas (on vacations, etc.). Translation: The potential remains huge for major free cash flow growth for a long time to come as its current and newer business lines push ahead. 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 already had a good-sized decline (28% deep, two months from high to low), and after recovering back to its high is holding up fairly well. We think this growth story has legs, and the stock is still in position to run if/when the market finds its footing.

Mobileye (MBLY): Similar to DUOL, Mobileye has spent the past few months in a correction (the peak was actually in February!), and it’s actually seen a bullish buying spree of late even as the market has fallen sharply. The firm’s advanced driver assist systems are very popular, and as autonomous driving comes into play, MBLY looks like the leader.

Nutanix (NTNX): NTNX is perched right near its peak, and for good reason—its move to a subscription business has matured, so free cash flow is set to roar ahead, and its cloud platform is becoming one of the go-to offerings that big clients are standardizing all of their IT infrastructure on.

Nvidia (NVDA): Yes, it’s had a huge run, but we don’t view any of the stock’s recent action as big-picture abnormal; in fact, the stock’s four-month period of no net progress might be enough to recharge its batteries for another move up—if the market cooperates, of course. The story (which overlaps a bit with VRT below) and numbers remain up there with any firm in the market.

Remitly (RELY): It’s still growing up and has already had a good-sized move this year, but the fact that RELY is holding up well in this maelstrom is a good sign. There is some competition here, but the opportunity is so large there’s plenty for everyone, and Remitly is certainly one of the leaders in revolutionizing the remittance space.

Vertiv (VRT): VRT broke out at 18 in May and more than doubled to its peak near 40—and despite the market’s deepening correction, has pulled back to just 36. Maybe it unravels from here, but the longer it resists the broad selling pressures, the better the odds the next big move is up.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, October 5. As always, we’ll send a Special Bulletin should we have any changes before then.