WHAT TO DO NOW: Do a little more buying. The overall market has snapped back nicely in recent days, and while our Cabot Tides have yet to turn bullish (they’re on the fence here), there’s been plenty of encouraging action among individual stocks. We’re still of the mind to be cautious overall—this correction could easily persist a few more weeks—but we are going to put a little money to work tonight, filling out our positions in both Pinterest (PINS) and Seattle Genetics (SGEN). Our cash position will still be around 33%, giving us cushion should the sellers reappear.
Current Market Environment
The market finished mixed today, with the Dow up 36 points while the Nasdaq was up 159 points and most growth stocks acted well.
Overall, we’re encouraged by the market’s action during the past few sessions, both from a top-down (indexes) and bottoms-up (individual stocks) perspective.
From a top-down perspective, our Cabot Tides are back on the fence, which is a good thing after the recent negative signal. Both the S&P 500 and Nasdaq have actually crawled back above their lower (50-day) lines by a smidge, while the others are close. That’s a good show of resilience.
Of course, close doesn’t cut it—at this point, the intermediate-term trend remains sideways-to-down, which argues for some caution. And we wouldn’t be surprised if the market had another, third leg down (or retest of the recent lows) in the days ahead, as these corrections often (not always) have three legs to them to scare out the weak hands. Still, that’s just a guess, and the recent snapback is certainly a plus, albeit not yet definitive.
The real bright spot of late has been individual stocks (bottoms-up)—as opposed to August, which saw solid performance from the indexes but borderline terrible action from many growth leaders, we’re seeing the opposite today, with many seeing big-volume buying and more breakouts to new highs.
To be clear, it’s not a runaway environment—the number of stocks hitting new highs has picked up a bit but remains tame, and most stocks that do poke their heads up for a few days are met with selling pressures (whether it’s because of company-specific reasons or just general market action).
All in all, we still think a relatively cautious stance remains appropriate due to the Tides and the lack of stocks letting loose on the upside. But we’re also encouraged that more and more stocks are setting up/acting well; many seemingly want to head higher if the market will let them.
Thus, we’ll do a little buying tonight while still holding a good-sized cash position by filling out our positions in Pinterest (PINS) and Seattle Genetics (SGEN), adding 5% positions in each, as both are off to strong starts. That will still leave us with about one-third in cash, giving us both cushion and buying power for whatever comes next.
Model Portfolio
Dexcom (DXCM) has begun to perk up with most growth stocks, bouncing off support near 380 and lifting back to its 50-day line. It’s possible the stock remains in its trading range (380 to 440, ballpark) until earnings (due out October 27), but we continue to think the next big move is likely to be up—stepping back, the four-month period of no progress here looks normal after DXCM’s huge advance prior to that. Continue to hold your shares. HOLD.
Five Below (FIVE) fell for a few days after our recommendation, but it’s done nothing wrong (we like that the volume on the selloff was bone dry) and has started to bounce. Retail stocks have been sluggish of late, but the long-term view here hasn’t changed, with Five Below’s rapid store expansion plan and best-in-class store economics driving growth going forward. A drop under 120 would be iffy, but we think new buyers can grab shares here. BUY.
Pinterest (PINS) is off to a good start for us, and we’ll respond by filling out our position (buying another 5% stake). Granted, we wouldn’t say PINS is at a pristine entry point; if you want to wait a day or two you might get a better price on buying this second piece. But we’re putting more emphasis on the bigger picture—PINS looks like a new leader in the online/e-commerce space, and just last week lifted to all-time highs (after a nice eight-week rest) on big volume. The market will obviously have a say in the short-term, but we think the stock is in the early stages of a new advance. We’ll use a mental stop in the 35 area (give or take) for the combined position. BUY ANOTHER HALF.
ProShares Ultra S&P 500 Fund (SSO) has bounced back nicely, though as we mentioned in the first section, we wouldn’t say it’s out of the woods—after falling from 83 to 67, SSO is now back to 74 or so and is right at its 50-day line. We’re happy to hang on, especially as the odds continue to strongly favor the overall bull market being intact. But we’ll stay on Hold and see how things go after this week-long bounce. HOLD.
Roku (ROKU) remains in good shape, rallying the past few days toward round number resistance near 200. After a year-long consolidation, we think the stock is ready to get going as the trend toward cord-cutting and connected TV accelerates. The dearth of volume on this latest rally attempt makes us hold back from filling out our position right now, we’re keeping our eyes open for an opportunity to average up. For now, we’ll stick with what we have. BUY A HALF.
Seattle Genetics (SGEN) has been super strong since it got going a couple of weeks ago, as the combination of Merck’s partnership (and $1 billion equity stake) and optimism about the firm’s new treatments (Padcev and Tukysa, the latter of which is now being sold by Merck in Asia, Latin America and the Middle East), has brought in the buyers. Yes, it’s extended to the upside, so like PINS, waiting a couple of days could possibly get you a better averaging-up point—but again, big picture, it looks like SGEN has just kicked off a new advance, and the recent power bodes well in our view. We’ll add another half-sized position (5% stake) here, using a mental stop in the 170 area on our combined stake. BUY ANOTHER HALF.
Twilio (TWLO) has been quietly marching higher, and it’s now about halfway back up from its two-month decline. Longer-term, we think TWLO has plenty of upside ahead, though right here, the lack of any upside volume means some more wiggles are likely. If you own some, sit tight, but there are probably better names to buy with fresh money. HOLD.
Wingstop (WING) is definitely our weakest stock, with only a minor bounce in recent days and still well below its 50-day line (up at 150 or so)—if the market continues to improve and this stock can’t get out of its own way, we could look for greener pastures. But as we’ve written before, WING has a history of going dead for a bit before resuming its major uptrend, and there’s certainly warning signs fundamentally. We’re holding on, but would like to see the buyers return soon. HOLD.
Watch List
Alibaba (BABA 290): BABA might be a bit slow and big for us these days, but it’s acting very well and stated an excellent volume clue after a bullish Investor Day this week.
Beyond Meat (BYND 171): We like the consumer-focused story here, as well as the growth and the strong stock (new multi-month highs this week). Our only rub is that BYND is hard to handle, regularly etching 5%-plus daily ranges.
CrowdStrike (CRWD 143): CRWD is our favorite among the new-age cybersecurity players right now due to its platform, growth numbers and outstanding relative strength in recent weeks.
Datadog (DDOG 104): DDOG broke out on huge volume yesterday after announcing a deal with Microsoft. The company’s application performance monitoring and management offering should be in huge demand for years.
DraftKings (DKNG 62) and Penn National (PENN 74): We continue to like the online casino/sports betting theme, and DKNG and PENN are the two leaders. That said, both are very volatile, so we’d prefer to enter after a little steam has come out of them.
NovoCure (NVCR 112): NVCR is back in gear after a big run in recent weeks. Any pullback or rest period could provide an opportunity to start a position.
Square (SQ 168): Square’s Cash App is driving a huge new wave of growth while its core payment offerings for merchants rebound as the economy reopens. The stock is perched near its highs, which is great to see.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, October 8. As always, we’ll send a Special Bulletin should we have any changes before then.
