WHAT TO DO NOW: Remain bullish. There are some cracks in the market’s armor, with some major indexes softening and the broad market under more and more pressure. However, our two trend-following indicators are positive and most leading growth stocks are acting fine. While we’re keeping a close eye on our stocks and will take action if necessary, we’re not making any major moves tonight. Our one change is to place Alibaba back on Hold. Our cash position remains less than 5%. Details below.
Current Market Environment
The sellers did some damage today, with the Dow losing 138 points and the Nasdaq dropping 32 points.
First and foremost, the evidence still points toward the overall bull market being very much intact. Our Cabot Trend Lines remain clearly bullish, many longer-term studies point toward higher prices in the weeks and months to come and big-picture sentiment measures like money flows tell us investors are far from fully embracing the bull market.
That said, the near-term situation bears watching for a couple of reasons. First, the broad market, which has been weakening for the past couple of weeks, has taken another turn for the worse. Our Two-Second Indicator remains unhealthy, and the number of new lows has expanded to north of 100 on the NYSE (with similar readings on the Nasdaq), despite the big-cap indexes being perched near their highs.
Second, speaking of the indexes, two of the five we track in our Cabot Tides (NYSE Composite, S&P 600 SmallCap) are slightly below their 50-day lines, while the S&P 400 MidCap is about 1% above its own 50-day line. Thus, a bad day or two from here could flip the intermediate-term trend.
That said, we always go with what we see today, and right now, both of our trend-following indicators (Trend Lines and Tides) are positive, and the vast majority of leading growth stocks remain in firm uptrends, with a notable lack of abnormal activity. If that changes, then we’ll change, but until it does, we’ll remain heavily invested.
But what about the broad market? Is it a warning sign? It is, but occasionally these divergences go on for weeks or months before resolving with a market retreat (or some vicious rotation). Thus, we’re mostly taking things on a stock-by-stock basis, though if we do sell a stock (or take partial profits), we’ll hold any cash from that sale until things get back in gear.
Tonight, though, we’re not selling anything, though we are placing Alibaba (BABA) back on Hold and are keeping a close eye on our other stocks for signs of selling. Our cash position remains under 5%.
Model Portfolio
Autodesk (ADSK 124) has basically marked time since we added the stock to the Model Portfolio two weeks ago. The stock might wait around for earnings (due November 28) before making a decisive move, but the chart looks fine to us, with the stock pausing normally after a nice rally in late September through October. We’re staying on Buy, though as we get closer to earnings, it’s probably best to keep new buys on the small side. BUY.
We thought Alibaba (BABA 181) was emerging from a two-month rest period last week, but that was wrong; shares have stalled out again and pulled back to its 50-day line. It’s not weak, and long-term, we still think BABA has further to run. But at this point, there’s no question the stock is a bit heavy, and the relative performance (RP) line hasn’t hit a new peak since late August. We hate to keep switching our rating, but we’ll go back to Hold, and stay there until the stock and RP line decisively move out to new highs. HOLD.
Exact Sciences (EXAS 57) went vertical for a few days following earnings, though it’s begun to pull back in recent days, due in part to one analysts’ downgrade earlier this week. Still, the big picture remains encouraging—management recently announced an expansion plan to eventually boost its capacity to 4.5 million Cologuard tests per year (up from one million today)—and EXAS’s retreat has been reasonable thus far. A break all the way back toward the 50 area would be abnormal, but right here, the action looks good to us. If you don’t own any, you could start with a half-sized position here or on dips of a point or two. BUY.
Five Below (FIVE 58) is still battling resistance around 58, but we’re OK with the stock at this point—it’s not a “go go” name, and shares did tag new high ground two days ago. Similar to ADSK, investors may be waiting for earnings (likely out at the very end of November or early December), but going with today’s evidence, the trend is up and the story is intact. BUY.
Facebook (FB 178) continues to look fine—it’s been pulling back in an orderly fashion to support in the mid-170s—but we wouldn’t call it a market leader at this point, as its RP line is no higher today than it was in late July. Given FB’s giant run since we bought it more than four years ago, we’re keeping our eyes open for signs of a long-term trend break and/or signs that the firm’s incredible growth is slowing (earnings are currently expected to rise just 13% next year). But right now the major trend is clearly up and we believe Facebook has years of fast growth ahead of it as it monetizes Instagram, Messenger and, eventually, WhatsApp. HOLD.
Grubhub (GRUB 63) is acting impressively, with shares refusing to budge at all despite a few early-morning selloffs during the past couple of weeks. Grubhub announced a deal with InterContinental Hotels (Staybridge Suites, Candlewood Suites, Holiday Inn Express) that will allow guests in more than 1,000 of these hotels to earn points using Grubhub’s services while staying at these hotels. We might average up if the stock (and market) remain in good shape. For now, though, we’ll just stand pat—hold on if you own some, and if you don’t, you can buy some here or on dips of a point or two. BUY.
PayPal (PYPL 73) released a bit of bad news earlier this week; it’s temporarily shutting down its TIO Networks (a bill payment platform it bought for $174 million this summer) because of a cybersecurity issue. Still, TIO is less than 1% of PayPal’s overall business, and the firm’s other platforms are unaffected. As for the stock, it’s been tightening up nicely around 74 after a steady rise in recent months. We’ll stay on Buy, preferring to buy on dips toward the 25-day line (now at 71.5 and rising). BUY.
ProShares Ultra S&P 500 Fund (SSO 100) hit a new high in early September at 95, and ran as high as 103 last week before the recent dip. A sell signal from our Cabot Tides would likely have us moving to a Hold rating (and if the selling really got ugly, we could sell a piece), but right here, this dip looks normal and buyable. BUY.
ServiceNow (NOW 123) remains range-bound following wild pre- and post-earnings action late last month. We don’t have much of a profit here, but the stock hasn’t done anything wrong, and a move north of 128 or so would be bullish. (Salesforce.com (CRM), the granddaddy of the cloud software sector, reports earnings on November 21, which could be a catalyst.) Analysts are nudging up their estimates, now looking for 31% revenue growth and a 50% earnings bump in 2018. If you don’t own any, you can buy some here with a stop in the 110 area. BUY.
We remain patient with our small position (about 3% of the portfolio) in Shopify (SHOP 98) as the stock remains above its longer-term 200-day line (now around 88). Plus, we’re encouraged that the stock has begun to tighten up, a sign that it’s coming out of the public’s eye, something that’s usually necessary before a new advance. Of course, maybe SHOP has topped, and if so, we’ll sell the rest on any breakdown, but right here, we think it’s best to give your remaining shares some rope. HOLD.
Universal Display (OLED 173) finally took a breather today, pulling back a few points after its huge post-earnings run. Clearly, a deeper retreat is possible, but as we wrote in last week’s issue, OLED’s recent run came after nearly five months of no progress—i.e., we see the recent strength as more of a kick-off than a blowoff top. If you have a big position (whatever that means to you), feel free to take a few chips off the table, but we’re holding onto our position, thinking any near-term weakness will lead to higher prices. If you’re looking to buy, start small on a dip of a few points. BUY.
Watch List
Diamondback Energy (FANG 107), Continental Resources (CLR 45) or some other energy stock: We’re intrigued that energy stocks may be turning a corner, but it’s a bit too early to tell. FANG and CLR are two names to watch, but there are others we’re looking at, too.
Planet Fitness (PLNT 30): It remains a bit thinly traded for our tastes, but that might be changing after its recent earnings move. This is probably our second favorite cookie-cutter story in the market right now (next to Five Below).
Pulte Homes (PHM 32): Despite the likelihood of another Fed rate hike next month and uncertainly surrounding the mortgage interest deduction, homebuilders (and PHM in particular) remain in fine shape.
