WHAT TO DO NOW: Remain cautious! The sellers continue to have the upper hand with the major indexes and most stocks. You should be holding plenty of cash (and some resilient stocks) while waiting for the bulls to retake control. We sold our remaining position in Ulta Beauty (ULTA) last night, and tonight we’re shifting Alibaba (BABA) to a Hold rating. Our cash position stands near 55%. Details below.
Current Market Environment
The market suffered another round of selling today, with the Dow dropping 77 points and the Nasdaq losing 48 points.
There’s no question the selling pressures have intensified in a big way during the past seven days. We’ve seen that in the major indexes (all have broken short-term support in recent days, with most falling to their lowest levels since early July), in our indicators (our Tides remains bearish, while our Two-Second Indicator is now unhealthy) and among individual growth stocks (many of which have broken down).
Longer-term, things aren’t as bleak, as our Cabot Trend Lines are still bullish, we’ve seen a good number of positive earnings reactions (given the market environment) and, sentiment-wise, there are signs of panic (spikes in put-call ratios and massive withdrawals from equity funds) that are typically seen close to market lows.
But we need to see buyers show some support for a few days before we get constructive on the market. We had been holding a 40% cash position for a few weeks, moved to a 50% cash position last Wednesday and, after selling our remaining small position in Ulta Beauty on a Special Bulletin last night, now have about 55% in cash. That seems good for now but we’re obviously watching things closely.
It’s no secret that the U.S. election is on investors’ minds, with a recent tightening in the polls creating uncertainty and, hence, jitters among investors. As we wrote in the issue dated September 29, this action isn’t unusual, and a sharp one- to five-day reaction following the election would also be par for the course.
However, elections rarely change the market’s major course; in other words, the market tends to do what it wants to over time. That doesn’t mean we’re necessarily predicting a big rally following next Tuesday’s election results, but that you should go with the market’s evidence.
If and when a new uptrend emerges, we’ll change our stance, but right now, you should hold plenty of cash and wait for the selling storm to pass.
Model Portfolio
Alibaba (BABA 99) reported a great quarter this morning, with revenues ($5.14 billion, up 55%) and earnings (79 cents per share, up 39%) topping expectations, and most of the sub-metrics looking enticing—cloud computing revenue surged 130%, mobile active users of its online marketplaces grew to 450 million (up 5.4% from the prior quarter) and free cash flow was a very healthy $2.1 billion. Yet the stock could only rally for a few minutes before the bears took control, driving the stock lower on big volume. (There were reports yesterday that the SEC is still sniffing around its books, which didn’t cause much selling yesterday but could have capped buying today.) Long-term, we still think BABA has a very bright future, so we want to give it every chance to resist the market’s downturn; we think the stock’s upside potential is huge in a bull market. But we’re also not going to let shares get away from us, either. We’ll move our rating to Hold and use a mental stop around our buy price in the mid 90s. HOLD.
Facebook (FB 127) dipped below its 50-day line today, but that’s not unusual in this market. (Nearly three-quarters of all Nasdaq stocks were below their 50-day lines coming into today.) That said, key will be the company’s earnings report tonight and the stock’s reaction to it in the days ahead. If you have little or no profit, a break below 123 or so would be bearish; with our large profit, we’ll likely hold on barring a major break into the mid-110s. But let’s not talk only about the downside—the growth story is still one of the best out there, and after many stops and starts in recent months, FB has great potential if/when the market finally gets going. We’ll stay on Buy but let’s see what the stock does in the days ahead. BUY.
PayPal (PYPL 41) gapped up strongly last week on earnings but gave up a chunk of those gains in the market’s swoon since. We bought after a few days of dips, and the stock has held firm since then, still holding above its 25-day line. (Incidentally, despite the straight-down market, many earnings winners have held much of their gains during the past week, which is encouraging.) PYPL should be a steady leader once the market gets going as big investors build positions in one of the leaders in the mega-trend of digital payments and money transfer. We’ll stay on Buy but only if you have plenty of cash on the sideline. BUY.
The ProShares Ultra S&P 500 Fund (SSO 67) is approaching our mental stop but hasn’t quite tripped us out yet—it looks like the 65 to 66 area will roughly coincide with the S&P 500’s long-term 200-day line (near 2,085 on the index). We’ll hold for now and stick with our plan. HOLD.
Ulta Beauty (ULTA 239) was sold via a Special Bulletin last night. Long-term, we still like the story, and if the stock (and market) eventually re-sets itself, we could always jump back on board. But the stock had a huge, prolonged run for more than a year, then suffered lots of abnormal selling following earnings two months ago. And after enjoying a huge rally on the back of higher short- and long-term guidance, ULTA quickly gave it all back. All together, that’s a longer-term red flag. We took partial profits a couple of times through ULTA’s run, and yesterday we sold our remaining shares; there will likely be better stocks to own once the pressure comes off the market. SOLD.
Watch List
Netflix (NFLX 122): It’s not a new story, but after more than a year of consolidation, the stock has come back to life on the promise of accelerating profit growth in the quarters ahead.
Proofpoint (PFPT 74): PFPT hasn’t made any net progress since late-July, but it surged on earnings last week and earnings are lifting off in a big way. This could be a new cybersecurity winner of the next market upleg.
ServiceNow (NOW 85): NOW gapped higher on earnings last week and has held those gains since. There’s still some overhead to chew through, but this looks like an emerging blue chip cloud software company that many big investors want to own.
Shopify (SHOP 44): SHOP reported a great quarter this morning, with revenues up 89% and the loss per share smaller than expected, which helped the stock pop higher today. This is a unique story that has huge growth potential.
XPO Logistics (XPO 33): XPO is still range-bound but has earnings out tomorrow morning (November 3). Any boost to the long-term cash flow outlook could kick-start a new uptrend.
Zillow (Z 35): Zillow released a great quarterly report this morning, and the stock reacted very well despite the sour market. We feel Z has another big leg up coming when the market gets going. Keep it on your watch list!
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Wednesday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
