WHAT TO DO NOW: Trim your sails a bit and see how the market handles itself going forward. Today’s whopping decline isn’t the end of the world for growth stocks, but the broad market is more worrisome, with the Cabot Tides now neutral and our Two-Second Indicator turning negative. Tonight we’re going to sell half our position in ProShares Ultra S&P 500 Fund and place Facebook, XPO Logistics and our half position in Tesla on Hold. Our cash position will now be around 21%.
Current Market Environment
The market suffered a huge selloff today as fears of Washington, D.C. scandals brought out the sellers. When the closing bell rang, the Dow had plunged 373 points while the Nasdaq collapsed 159 points.
By itself, today’s shock to the system doesn’t mark the end of the line for the Nasdaq and leading growth stocks. This was the first bad day we’ve seen in three to four weeks, and the fact that there was a high-profile reason attached to it (scandals in Washington, D.C.) is somewhat comforting, as sustained trouble for the market usually comes from where you least expect it.
However, outside of growth stocks, today’s selloff adds to some worrisome evidence; the major indexes apart from the Nasdaq have failed to hit new highs during the recent month-long rally, and now our Two-Second Indicator has turned negative, as today is the fifth straight day of greater than 40 new lows on the NYSE.
Today’s decline also puts our Cabot Tides on the fence, telling us the intermediate-term trend is neutral, though our longer-term Cabot Trend Lines remain bullish.
In these split-tape environments, history tells us to keep most of our focus on the leading index (Nasdaq) and leading stocks (growth stocks)—they usually provide the best clues on when the sellers are taking control. As mentioned above, growth stocks are mostly in decent shape despite today’s wallop.
But the divergence of the major indexes and the red light from the Two-Second Indicator are warning signs. In the Model Portfolio, we’re taking a couple of small steps away from the market—we will take partial profits in ProShares Ultra S&P 500 Fund (SSO), and we’re also going to place Facebook, XPO Logistics and our half position in Tesla on Hold.
Should the market weaken materially after today’s drop, we’ll raise more cash, but today’s move to about 21% in cash (with the partial sale of SSO) seems about right for now.
Model Portfolio
Alibaba (BABA 121) accelerated higher during the past couple of weeks, tagging new all-time highs before getting yanked down today. Overall, it remains in fine shape, but the intermediate-term outlook will probably come down to earnings, which are due tomorrow morning. A retreat all the way back down to the 110 area would probably have us selling, but overall, we’re optimistic the stock’s major trend has turned up. We’ll stay on Buy but will update you after the report if we have any changes. BUY.
Facebook (FB 145) looks fine overall, but we’re going to place the stock on Hold tonight because (a) it’s had a big run since the start of the year, (b) it got a little out of trend on the upside in late April, which often precedes a rest period, and (c) its post-earnings action has been a bit soft. Long-term, we still think FB can go higher, but given the market and the above factors, we’ll move to Hold. HOLD.
Netflix (NFLX 153) was whacked today, but volume was reasonable and the fact that the stock only recently lifted from a three-month rest area (which ended with a post-earnings shakeout) improves the odds that this dip is buyable. If you don’t own any, you can take a position here; a drop back to the low 140s would be a red flag. BUY.
We bought our initial position in ProShares Ultra S&P 500 Fund (SSO 85) a year ago (we also averaged up last July) and have been sitting tight ever since. But SSO has grown to be a large position in our portfolio (nearly 16%), it’s made no progress in nearly three months and, with today’s selloff, may have etched an intermediate-term top. We still believe we’re in a longer-term bull market, but we’re going to sell half our shares tonight and hold the rest. SELL HALF, HOLD THE REST.
Shopify (SHOP 90) has had an explosive move this month, surging from the low 70s to the mid-90s in just a couple of weeks. Near-term, we think SHOP could see some further retrenchment given its recent run and because the stock is a bit out of trend on the upside; that’s why we’re sticking with a Hold rating on our remaining shares. (Remember that, to us, Hold really does mean Hold, unlike Wall Street.) Longer-term, though, it would be unusual for the stock to top out just four months after breaking out—any consolidation should lead to another upside attempt. If you bought with us and sold one-third of your stake earlier, we advise sitting tight. HOLD.
Tesla (TSLA 306) has been all over the place since we bought our half position in late April, with its latest weakness stemming from a couple of cautionary analyst notes earlier this week. TSLA isn’t in a bad position, but it has underperformed some of the stronger growth stocks and the selling volume following earnings was big. Given the market, we’ll shift to Hold—we have a mental stop near 290 (or a bit above) for our half position, while we would consider averaging up on a powerful push to new highs. HOLD.
Universal Display (OLED 111) is still extended following its huge earnings gap, but like many growth stocks, the stock looks early stage to us, having just lifted out of a two-month base, which itself came after a six-month rest. Hold on if you own some, and if you don’t, you can buy some around here or on dips of a couple of points. BUY.
Veeva Systems (VEEV 57) is another stock that’s had an accelerated upmove of late, with yesterday’s stretch higher nearly getting it to 60 before some selling kicked in. Short-term, a retreat is possible, but the big event will be earnings, which are due out next Thursday (May 25) after the market closes. Right here, we’ll stay on Buy, but try to buy on dips and keep new positions small this close to the report. BUY.
We hate to keep flipping our rating, but we’re moving XPO Logistics (XPO 52) back to Hold tonight mainly because of the market’s warning signs and the awful action of the transportation sector, which is closing in on six-month lows. We have a mental stop around 49 should the selling intensify, while a push to new highs above 56 would be the sign that a sustained uptrend has gotten underway. HOLD.
Watch List
Exact Sciences (EXAS 30): EXAS fell sharply this week after a short-selling outfit attacked it, but the overall uptrend is intact and we still think the firm’s colon cancer screening product is for real. It’s worth watching.
Five Below (FIVE 52): FIVE has begun to hesitate after a very persistent upmove. Another couple of weeks of consolidation could provide an entry point for this cookie-cutter growth stock.
PayPal (PYPL 49): After a couple of false starts, PYPL has decisively broken out of its long post-IPO trading range. It’s not a barnburner but big investors are thinking cash flow can grow 15% to 20% for many years to come.
Zillow (Z 41): Z has come to life after a nine-month rest, though its relative performance (RP) line is still a bit shy of its old highs. Management sees sales up 25% this year with EBITDA (a measure of cash flow) up 50%.
