NOTE: We’re sending out this week’s update a touch early as our offices are closed tomorrow for Good Friday (and we have a backlog of other stuff to get done as well). Have a great long Easter weekend; we’ll be back at it per usual on Monday.
WHAT TO DO NOW: Remain cautious. The market and growth stocks have found support of late, and we’re also seeing more names building legitimate launching pads, both of which are good to see. We’re open to anything and have our eyes peeled for a change in character, but the market and growth stocks still have work to do to show that the sellers have left the building. Tonight, we’re standing pat with our 55%-ish cash position.
Current Market Environment
Growth stocks had a great day yesterday for the first time in a while—while the Dow lost 85 points, the Nasdaq lifted 201 points (1.5%).
After a poor few days, growth stocks have found their footing in recent days—we have finally seen some of the beaten-down technology stocks begin to bounce, including some on good volume. That’s helped the Nasdaq, which is now seven weeks into its correction/consolidation and looks set to challenge its 50-day line from below.
We’d also say that many stocks are now six to 10 weeks into new launching pads, with the Nasdaq itself seven weeks into this correction/consolidation. Time-wise, this gives growth stocks a better chance to have built a firm foundation for a fresh advance going forward—no guarantees, of course, but the odds are a lot better than a few weeks ago when most names had only just cracked after huge runs.
Thus, we think it’s fair to say the evidence for the market (and growth stocks in particular) has improved compared to the past couple of weeks; we’re open to the possibility that the market’s character could begin to change going forward.
However, to this point, there really hasn’t been enough to get us to change our overall stance. For that to change, we’d like to see the Nasdaq above its 50-day line (call it above 13,450) and, more importantly, to see some growth stocks hit new highs and hold their gains. To this point, just about every name that’s attempted to get going has been quickly smacked lower, and the latest bounce in the Nasdaq has been led by the beaten-down names that were hugely (30% to 40%) off their highs. Again, up is good, but bouncing after that sort of decline isn’t overly telling.
We’ll be watching for those factors to play out in the days ahead. If they do, we could put some money to work next week. But at this point, we think it’s best to remain close to shore—tonight we’re sitting tight with our 55%-ish cash position and current crop of stocks.
Model Portfolio
DraftKings (DKNG) was one of many stocks that got whacked after tasting new-high ground, and then fell further on Monday after reports that gambling legalization in New York was hitting a snag. Overall, the chart is far from a horror show—after the bounce of the past two sessions, shares are near their 50-day line and have etched a series of higher lows in recent weeks. For our part, we’re just following the plan we laid out when we entered—with “just” a half-sized position, we’re using our maximum loss limit (20% on a closing basis; 1% total portfolio risk), which correlates to the 57 to 58 area. A close below there would force our hand, but until then, we’re holding on. If you’re willing to use a tight stop, we’re still OK picking up a small position here. BUY A HALF.
Five Below (FIVE) continues to hack around with resistance at 200, though selling pressures have so far lasted just a day or two before easing up. As we wrote in last week’s issue, all signs point to Five Below not just being back on its prior growth path, but on a better growth path than before thanks to improvements made during the pandemic (e-commerce, Five Beyond, etc.). Hold on if you own some, and if you don’t, we’re OK picking up a few shares here. BUY.
Compared to many of its peers, Pinterest (PINS) actually showed a bit of relative strength in recent days, dipping as low as 66, which was well above the early-March low (60). (Many other tech/Internet/e-commerce plays slid to lower lows.) And now the stock has begun to bounce back a bit, nosing above its 25-day line for the first time since growth stocks cracked. That’s not a green light in our view—there’s still plenty of resistance to chew through; a move above 76 would be intriguing—but PINS continues to act like this six-week rest should eventually lead to another leg up. HOLD.
ProShares Ultra S&P 500 Fund (SSO) hasn’t made a ton of progress during the past six weeks, but at day’s end, the trend remains up—to this point, sector rotation has kept the S&P 500 finding support every time it dips toward (or slightly below) its 50-day line. If the correction broadens out and SSO breaks down, we could trim our position, but we continue to ride the trend near-term, and are aiming to play most of our position out longer-term as this bull market likely has gas left in the tank. BUY.
Twilio (TWLO) fell to a lower low earlier this week while testing its long-term 200-day line, but then support showed up, with the stock popping 35 points or so soon after. We’ll take it, but the stock has a ton more work to do before we can conclude that the correction is over. We advise holding on, though the 300-ish level will be key if the sellers make another go at it. HOLD.
Uber (UBER) remains in its wide trading range and has begun to quiet down some, which we take as constructive. Meanwhile, the fundamental story continues to improve, with a couple of bullish moves last week in the Delivery business—Uber became the default delivery service for ScriptDrop in 37 states (an outfit that allows local pharmacies to offer delivery), while it also expanded its partnership with Nimble to include Chicago and Atlanta (it now delivers in nine cities plus Orange County). Nothing has changed with our thoughts here—UBER should enjoy another leg up as business storms ahead , though we’re keeping a mental stop in the upper 40s in case something goes awry. HOLD.
Watch List
Floor & Décor (FND 95): FND has chopped around but has remained well above its early-March low (91 vs. 81 back then) and the housing sector looks strong.
Pioneer Natural Resources (PXD 159): PXD has been the most resilient of the energy stocks as it consolidates for three weeks. If shares can chill out for another couple of weeks we could take a swing at it.
SelectQuote (SLQT 30): SLQT has now held its 50-day line twice during the correction and is beginning to perk up. We think this growth story has a long way to play out.
Shake Shack (SHAK 113): SHAK continues to bounce around between 105 and 130 (ballpark)—we’re open to adding another cookie-cutter story, whether it’s this one or FND.
Shockwave Medical (SWAV 130): Shockwave is a small firm that has a better mousetrap when it comes to treating atherosclerosis (narrowing of the artery due to plaque buildup). Growth has been rapid, and a booming Q1 outlook has caused the stock to gap back toward the top of its launching pad.
Wayfair (W 315): W sold off after testing new high ground last week, which is par for the course in this environment. But it’s still in position to get moving if the market does.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, April 8. As always, we’ll send a Special Bulletin should we have any changes before then.
