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Cabot Growth Investor Bi-weekly Update

Our Two-Second Indicator remains negative, our Cabot Tides are now on the fence, and the breadth-related yellow flags have led to some strong selling this week. Short-term, it’s best to pare back on any stocks that break down; longer-term, though, we remain optimistic.

WHAT TO DO NOW: Trim your sails. Our Two-Second Indicator remains negative, our Cabot Tides are now on the fence, and the breadth-related yellow flags have led to some strong selling this week. Short-term, it’s best to pare back on any stocks that break down; longer-term, though, we remain optimistic. In the Model Portfolio, we sold Texas Capital Bancshares (TCBI) on a Special Bulletin last night and placed three stocks on Hold. That leaves us with about 28% in cash. Details below.

Current Market Environment

After yesterday’s huge selloff, the market held its own today, with the Dow losing 7 points and the Nasdaq rebounding 28 points.

After months of relatively smooth sailing, the market has finally hit a good-sized pothole, with the major indexes plunging yesterday and adding more losses today. As always, we’re focused on the evidence at hand. Here’s what it says:

Short- to intermediate-term, there are reasons to pull in your horns, as our Cabot Tides are now on the fence and our Two-Second Indicator remains negative. In addition, we’ve seen a few areas of concern crop up in recent weeks (most of them breadth-related), as we wrote about in last week’s issue, and now, of course, we’re actually seeing sellers make a stand.

That said, longer-term, we remain optimistic for a couple of reasons. First, of course, is that our Cabot Trend Lines are still solidly bullish. That alone tells us the odds favor higher prices in the months ahead.

Second, history tells us the strength we’ve seen in the market during the past few months is highly likely to lead to higher prices down the road. Whether it’s the New High Buy signal we wrote about on February 15 (Issue No. 1361) or our 7.5% Rule (we’ll write more about this in our next issue), it’s very likely we’re in a bull market, which means higher prices after this selling finishes up.

Long story short, we’re taking things on a stock-by-stock basis, selling names that break down and cutting back on new buying. But we’re also aiming to stick with our winners and resilient stocks.

In the Model Portfolio, we sold Texas Capital Bancshares in last evening’s Special Bulletin, while placing three other stocks on Hold. We’re standing pat tonight with our seven stocks and a cash position of around 28%.

Model Portfolio

Charles Schwab (SCHW 40) has been caught by in the meltdown of financial stocks, which was caused by the group’s big run since the election, worries that interest rates won’t rise as much as expected this year, and fears that tax reform will get pushed out for many months. That said, SCHW has held the 39 level so far, which is a support level that’s brought in buyers three other times this year. We’ll hold our shares but keep them on a tight leash. HOLD.

Facebook (FB 140) had a big reversal yesterday, but found support today at its 25-day line. If the market really takes a tumble, FB will likely retreat with it, but so far there’s been no abnormal action, and the stock’s persistent uptrend so far this year likely portends higher prices ahead. Fundamentally, Instagram announced today it now has more than one million active advertisers, which is quadruple the amount it had a year ago! We’ll stay on Buy. BUY.

Lumentum (LITE 51) had a rough start for us but now it’s looking healthy—the stock exploded off support last week on huge volume and has continued with its winning ways this week. The company announced an extension of its 100G datacom product line, which is in huge demand (revenues from that area were up 500% in the fourth quarter). It’s a very volatile stock, but we’re OK taking a small position here or on dips, thinking the stock’s pullback is over. BUY.

Netflix (NFLX 143) actually poked out to new price highs yesterday morning and is just 3% or so off all-time highs, so we can’t say the stock is very weak. But it also hasn’t made much progress in recent weeks, which is a worry. We went to Hold last night and are keeping a mental stop in the mid-130s. HOLD.

ProShares Ultra S&P 500 Fund (SSO 84) has been consolidating all month (ever since the sharp rise on March 1), but remains above its 50-day line and, thus, remains in an intermediate-term uptrend. As we’ve written before, we could take partial profits should SSO crack its 50-day line, but we want to hold a chunk, too, thinking the longer-term will see higher prices. If you don’t own any, we’re OK taking a position here as the fund tests support. BUY.

Shopify (SHOP 67) has earned the right to pull back for a bit after its huge year-to-date advance, so while yesterday’s huge-volume reversal wasn’t the prettiest thing on the chart, we don’t view it as a major red flag. Looking ahead, we could take partial profits if the market decisively breaks down, but we continue to think SHOP’s action and fundamentals give it a chance to be a bigger winner. Right here, we’re staying on Buy, though we’d keep positions small. BUY.

Texas Capital Bancshares (TCBI 79) could eventually get going if and when financial stocks rebound. But yesterday, the stock crashed below its 50-day line on huge volume, along with many of its peers. Combined with our loss, we cut bait on yesterday’s Special Bulletin. SOLD.

XPO Logistics (XPO 47) has been yanked lower by the market and by the terrible action of the transport sector (the Dow Transports just hit their lowest level since December this morning!). There is support around this level (both from the 50-day line and prior price support), but we moved our rating to Hold yesterday and will keep a mental stop about three points below here. HOLD.

Watch List

Alibaba (BABA 106): BABA had shown some signs of getting going but was yanked back into its consolidation by the market’s wobbles. Even so, it’s not in bad shape and remains worth watching.

Arista Networks (ANET 131): ANET is a highflier, but so far, it’s holding up very well. Honestly, a normal pullback and consolidation in the weeks ahead would probably do the stock good and set up a solid entry point.

Pulte Group (PHM 23): Homebuilders look fine, dipping modestly this week. Many stocks are acting well in the group, but PHM is our choice because of its broad geographical footprint, buoyant earnings estimates and aggressive capital return program.

Square (SQ 16): SQ has backed off this week but remains in good shape, trading near the top of its earnings gap last month. Sales and EBITDA growth should remain very strong in the quarters ahead.

Universal Display (OLED 82): OLED has dipped to its 25-day line on modest volume, which is completely normal following its huge run. There’s risk here if the OLED market fails to materialize as hoped, but if things go right, the stock could be a huge winner as earnings explode.

Veeva Systems (VEEV 49): VEEV has come back to life after six months of no progress. The potential is huge as its cloud software offerings dominate the life sciences industry and it’s expanding into other industries as well.

Wynn Resorts (WYNN 113): It’s been a bumpy turnaround for WYNN and its Macau peers, but both the fundamentals (seven straight gains of Macau gaming gains; WYNN’s newest resort’s results are tracking ahead of estimates) and technical indicators (the stock has risen to 11-month highs) are increasingly positive.