What To Do Now: Remain cautious. Our Cabot Tides remain under pressure, with the indexes (including growth indexes and funds) showing no ability to bounce in recent days. On the plus side, sentiment is getting pretty dour (a good thing down the line) and many growth stocks are still hanging in there, but we’re playing mostly defense and seeing how this correction plays out. Earlier this week, we cut bait on DocuSign (DOCU) and placed Cloudflare (NET) on Hold, leaving us with 45% in cash. We’ll sit tight tonight, but will be on the horn with any other actions in the days to come.
Current Market Environment
The major indexes were mixed today, though growth stocks found a bit of support in general. As of 3:20 pm, the Dow was off 263 points while the Nasdaq was actually up 61 points.
A week ago, things were looking up—the market had bounced very nicely from its Monday break and growth stocks were acting better than most. But in pure 2021 fashion, the script has flipped 180 since then, with growth stocks starting to implode last Friday and the rest of the market going along for the ride on Tuesday.
As we look at all the evidence, here’s what we see: First off, our Cabot Tides remain negative in our view; if you’re an optimist you can say they’re neutral, but we haven’t seen enough strength to reverse the clear breakdown a week ago (not to mention some topping action before that). Second, many (but not all) growth indexes have cracked as well, with most hitting lower lows and some multi-month lows. In fact, even after some selling in recent days, these indexes haven’t been able to get off their knees.
Because of this, we’re sticking with a cautious stance—selling stocks that crack, holding plenty of cash and focusing mostly on capital preservation until the buyers reappear.
There are a couple of items on the positive side of the ledger, though. One is sentiment—the headline worries (Evergrande, debt ceiling, rising interest rates, etc.) have begun to dampen a wide variety of measures. The AAII survey, for instance, has been in the dumps for three weeks, today’s NAAIM Institutional Exposure Index plunged to its lowest level since May and the 15-day average of new highs on both the NYSE and Nasdaq are at their lowest levels since last November. None are truly extreme yet (that will take more time), but investors are certainly getting uncomfortable.
Second, among individual stocks, we are still seeing a good number of stocks hold up despite having seen two relatively sharp mini-legs down—fewer than a week ago for sure, but oftentimes you’ll see most leaders crack ahead of the top in the indexes, foreshadowing a downturn. So far, that hasn’t been the case here, with more than few growth names still acting normally.
Considering both of those rays of light as reasons to continue taking things on a stock-by-stock basis, but it’s best to stay close to shore and see how this correction develops. In the Model Portfolio, we sold DocuSign (DOCU) on a special bulletin earlier this week, leaving us with around 45% in cash. We have Cloudflare (NET) on a tight leash, but we have no further changes tonight—but we’ll be on the horn if that changes in the days ahead.
Model Portfolio
Asana (ASAN) got caught up in the selling on Tuesday, plunging down toward the century mark on big volume before finding support. On one hand, the outsized three-day selling wave (125 to 100!) likely isn’t over; usually these big off-the-top drops lead to some iffy action in the near-term. That said, shares are still above their 25-day line (!), which shows you how extreme the prior advance was. Big picture, we think the stock is OK, and given that it’s fresh merchandise, likely can be a leader during the market’s next upturn; indeed, we’re sticking with our Buy a Half rating here. But let’s see how it goes—another bad-looking down move could have us going to Hold, but the longer it can hang around these levels, the better. While we wouldn’t trade off this, the company’s co-founder and CEO piled into a ton of shares this month near this level (95 to 100 area), which in theory should be another reason to expect support. BUY A HALF
Cloudflare (NET) has gone from looking great to looking questionable right quick—we don’t like the five days in a row down right off the top (and through the 50-day line), all on above-average volume. That’s a bearish “volume cluster” that, after a good run, is not a good sign. That said, a few days of sharp selling during a weak growth stock spell after a multi-month rebound isn’t uncalled for—as usual, the question is if/how well it bounces from here. A weak bounce (or none at all) would likely have us cutting bait, but if the buyers can show life, we’re happy to hold on. Sit tight for now but stay tuned. HOLD
Devon Energy (DVN) nearly kicked us out of our position a few times in the past couple of months, but now it acts great as the sector has come alive. Better yet, DVN was one of the first oil names to race to new highs (on big volume, to boot), confirming our thought that its superb cash flow profile puts it near the top of the sector. Of course, oil stocks are rarely known for straight-up moves, so some sort of shakeout wouldn’t be surprising. But the longer oil (now around $75 per barrel) and natural gas ($5.75 or so) hold at these levels, the bigger the dividends (and debt paydowns) will be down the road. Today, 49 cents per share was paid to shareholders, and the next quarterly report (and dividend announcement) will come November 2. Hold on if you own some, and if not, you can start small here or (ideally) buy some on dips of a couple of points. BUY
Big picture, we think it’s possible that DocuSign’s (DOCU) overall action during the past 13 months (when it hit its initial peak) could prove to be one big launching pad following last year’s humongous run-up. But right now, there’s no question the buyers have left the building, with DOCU easily slicing to new correction lows this week. There is some support near 250, so maybe that will bring in a few buyers, but there’s a good chance of a deeper retreat and that there will be better situations to own during the next uptrend. SOLD
Dynatrace (DT) is one of the better-looking growth stocks out there, holding above its 50-day line at its Tuesday nadir and bouncing decently since. And it’s good to see peer Datadog (DDOG) is in the same boat—yes, there’s always the chance that they’ll be next up for the firing squad, but the longer they resist, the better the chance they’ll have good runs when the market’s storm passes. The only thing on the news wire of late was that Dynatrace completed its purchase of SpectX, a bolt-on acquisition that will boost its platforms’ analytics capabilities (for both observability and security). A drop below 66 or so would have us going to Hold—but right here, we’re sticking with our Buy rating, though we advise keeping new positions on the small side given the environment. BUY
Floor & Décor (FND) has been selling off with the market, and it actually nosed below its 50-day line mid-day. But, at the risk of being complacent, we’re going to stay on Buy—the decline has come on very light volume and the stock remains well above its lows of July (102) and August (111). Of course, rising interest rates (never a good thing for construction-related issues) could be a bugaboo here, but stepping back, we think the uptrend in the stock and the overall story is still intact. BUY
ProShares Ultra S&P 500 Fund (SSO) continues to correct, though it’s acting a bit better than the growth-oriented indexes, resting its lows from early last week today. We’re aiming to give our remaining shares some more rope, as the evidence suggests the overall bull market is still intact and that this correction will eventually give way to higher prices. Of course, we just sold half our stake and still have a big profit in the remaining shares, so if you haven’t done that, paring back makes sense. But if you’ve been following along, hold. HOLD
Watch List
Affirm Holdings (AFRM 120): You’d expect a super-volatile, somewhat controversial stock like AFRM to give up the ghost in a tough market—but, while it’s certainly shaking and baking, it acts fine. Fundamentally, the credit risk here is real if the economy weakens, but with Amazon and Walmart now customers, the upside is massive as the Buy Now, Pay Later boom continues.
Ambarella (AMBA 155): AMBA has taken some lumps, but in the context of its recent move the dip has been totally normal—and on light volume, too. We think the company has something special going on with its computer vision chips.
Dexcom (DXCM 549): DXCM dipped straight down to its 50-day line on Tuesday and found support where it “should.” Given the advance since May and the market environment, further weakness/rest is possible, but there’s little doubt the growth story is set to accelerate in the quarters ahead as he G7 hits the market. Combined with the fresh breakout on July 30, higher prices are likely down the road.
DoorDash (DASH 208): DASH continues to act normally and, while next year’s growth estimates are light, they’re likely conservative as the company continues to branch out into new delivery services. As we wrote in last week’s issue, a bit more seasoning here wouldn’t be the worst thing, possibly creating a better setup.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, October 7. As always, we’ll send a Special Bulletin should we have any changes before then.
| Stock | No. of Shares | Price Bought | Date Bought | Price on 9/30/21 | Profit | Rating |
| Asana (ASAN) | 1,354 | 73 | 7/22/21 | 105 | 45% | Buy a Half |
| Cloudflare (NET) | 1,790 | 113 | 6/25/21 | 113 | 0% | Hold |
| Devon Energy (DVN) | 7,240 | 28 | 5/7/21 | 35 | 26% | Buy |
| DocuSign (DOCU) | — | — | — | — | — | Sold |
| Dynatrace (DT) | 3,114 | 65 | 8/6/21 | 72 | 10% | Buy |
| Floor & Décor (FND) | 1,845 | 111 | 4/9/21 | 122 | 9% | Buy |
| ProShares Ultra S&P 500 (SSO) | 871 | 60 | 5/29/20 | 121 | 102% | Hold |