WHAT TO DO NOW: Trim your sails. The market’s recent slide has cracked the intermediate-term uptrend, and while the overall bull market is still intact, chances are the market is going to need some time to correct and consolidate going forward. In the Model Portfolio, we’ve sold one-third of our shares in both Five Below (FIVE) and PayPal (PYPL), and all of our shares in Diamondback Energy (FANG) on Monday, raising our cash level to 27%. We have no new changes tonight.
Current Market Environment
The market was volatile again today but finished on the downside, with the Dow losing 19 points and the Nasdaq falling 64 points. Here’s where we are after the past few hectic days:
First, our Cabot Trend Lines remain bullish, and it’s important not to forget the many positive longer-term studies we wrote about a few weeks ago. Thus, this is still an overall bull market.
Second, our Cabot Tides turned negative Monday and remain so today. Our Two-Second Indicator is also negative, as we’ve seen a torrent of new lows during the selloff (and unlike before, many are common stocks, not interest rate-sensitive bonds and preferred stocks).
So what does it all mean? In the very short term, some upside wouldn’t surprise us, as there were a ton of near-term selling extremes (VIX, ETF volumes, etc.) in recent days.
That said, given the huge prior run-up (there hasn’t been any sustained market-wide selling in 15 months!) and the many sentiment extremes that we wrote about in December and January, it’s likely the market needs some time to consolidate and correct further, get investor sentiment down and allow big investors to reposition their portfolios. Whether that means a few weeks or a few months is up in the air, but the odds of a straight-up move from here are small (though not zero).
Given all that, we advise handling this like a “regular” intermediate-term correction until proven otherwise. That means raising some cash by selling your worst performers, taking some partial profits and being very selective when it comes to new buying. It also means keeping mental stops in place on other stocks in case the sellers retain control for a while.
That said, you should also give your resilient performers a chance to hold up, as a few could be leaders of the next upmove. In fact, we’re pleasantly surprised at how many good-looking charts there still are out there.
In the Model Portfolio, we sent two Special Bulletins on Monday (one in the morning, one after the close) that in total advised selling one-third each of Five Below and PayPal, and all of our shares of Diamondback Energy. That boosted our cash position to around 27%, which is reasonable for now, though we’re watching things closely and will alert you if there are any changes.
Model Portfolio
Alibaba (BABA 180) reported a good-not-great quarter last week—revenue growth (up 66%) was terrific, driven by a 57% gain in its core commerce business (which still makes up 88% of revenues) and a 104% boom in its cloud computing offerings, and helped along by a healthy 5.5% gain in customers from the prior quarter. Earnings, though, came in a bit short of expectations, as the firm spent a bunch of money. Still, earnings estimates remain mostly unchanged (analysts are looking for 29% growth in the fiscal year starting in April). The stock has taken a hit with everything else, but basically just fell back to the mid-point of its prior consolidation. If you own some with a good profit, hang on. HOLD.
Diamondback Energy (FANG 119) doesn’t look bad, but it was showing us a loss after more than a month of owning it, so we decided to cut it loose given the Tides sell signal. If energy stocks and the market stabilize, and if FANG gets moving again, we could revisit the stock; the story remains excellent. But we sold on Monday evening’s Special Bulletin and are holding the cash. SOLD.
Not surprisingly, E*Trade (ETFC 52) took a hit with the market but the damage hasn’t been too bad—the stock is just 7% off its all-time high and a point above its 50-day line. A prolonged market downturn (months) that sours sentiment (and maybe limits interest rate hikes) would be bearish, but we’ll just play it as it comes. ETFC is holding its own, so we’re fine holding our shares. HOLD.
Facebook (FB 180) has been all over the place so far this year, but the overall trend for the stock is gradually up (slightly higher highs and higher lows), though its RP line remains mostly flat. The quarterly report last week was great, with sales (up 47%) and earnings (up 83%) both topping expectations and all the sub-metrics looking good. We’re still curious about the earnings estimates—analysts see the bottom line rising just 18% this year, which, even if it proves conservative (as it likely will), would still be a big slowdown. B we’re not sweating it too much, though—if you own some with a good profit, sit tight. HOLD.
Five Below (FIVE 64) was acting suspiciously for most of January, having taken a big hit and being unable to rally even when the market was soaring. Thus, when the market came under pressure, we decided to take partial profits (selling one-third of our position) on Monday morning’s Special Bulletin. From here, we’ll give our remaining shares some rope, with a mental stop in the upper 50s. We still enthuse about this growth story (years of 20%-plus growth ahead) and a push back above 68 (and a healthy market) would probably tell you the stock’s correction is over. But right now we’re on Hold and watching our stop. HOLD.
Grubhub (GRUB 70) has had a lot of movement in recent weeks, but net-net, the stock has basically been in a range from 66 on the low end to 75 on the high end. We’re fine with that, but the key will be earnings, which are due out tomorrow after the close. A decisive break down would be bearish at this point, while a strong reaction would continue the stock’s uptrend. Right here, we’ll stick to a Hold rating and see what comes. HOLD.
PayPal (PYPL 76) had a great fourth quarter, with sales (up 26%) and earnings (up 31%) slightly topping expectations thanks to a 29% gain in total payment volume, 8.7 million new accounts (227 million total, up 15% from a year ago) and 33.6 transactions per account (up 8%). Even better, free cash flow totaled nearly 80 cents per share, well above reported earnings, with management looking for around $3.75 per share of free cash flow this year (compared to earnings estimates of $2.28 per share). However, the stock took a hit after eBay said it would phase out PayPal from being the sole payment provider on its platform by mid-2020, though PayPal would continue to be a payment option for a couple of years after that. It’s not good news, but we don’t see it as a major negative, and analysts have actually hiked their estimates going forward. That said, we can’t ignore the stock’s drop, either. Long story short, we decided to sell one-third of our remaining shares on our Special Bulletin Monday morning, but will hold the rest with a loose mental stop in the upper 60s to give the stock a chance to resume its longer-term uptrend. HOLD.
ProShares Ultra S&P 500 Fund (SSO 109) was switched to Hold earlier this week when our Cabot Tides turned negative. As we wrote above, after a big run by the market for many months, it’s likely the S&P 500 needs some time to digest those gains. If the downturn gets hairy, we could take a few of our SSO chips off the table, but we’re still thinking the overall bull market is intact and will lead to higher highs down the road. HOLD.
Shopify (SHOP 123) continues to pile on positive technical action. First came the decreased volume during the four selling waves in Q4, including the tightness near year-end. Then came a mostly uninterrupted advance in January, including a push to new highs two weeks ago. And now, during the market’s dive, SHOP briefly dipped toward its 10-week line before snapping back nicely. We’ll also be looking for some positive fundamental evidence when earnings are released on February 15. Right now, though, we think the odds are rising that SHOP has turned the corner. If you don’t own any, you can pick up a small position here—if the stock remains resilient and the market returns to health, we could buy more shares down the road. BUY.
Splunk (SPLK 89) was added at just about the worst time possible—in last Wednesday’s issue, just before the market began to collapse! Despite that, we’re pleased with how the stock has held up, remaining above its 50-day line. We’ll stay on Buy, but it’s best to keep new positions small for now. BUY.
Watch List
Canada Goose (GOOS 38): GOOS remains very strong, barely pulling back during the market’s dip and hitting a new high today. Earnings are out tomorrow morning.
Ligand Pharmaceuticals (LGND 154): LGND pulled back to the top of its prior base, which is normal action given the market. Earnings are due out February 21.
Lululemon (LULU 81): After a five-year rest, LULU is trying to get going as business picks up. The growth isn’t outstanding but is steady and estimates are probably conservative. A new CEO could also be a plus.
Snap (SNAP 21): SNAP fell sharply for the first five months after coming public, then etched a bottom for six months after that. Today, the stock exploded higher on out-of-this-world volume following a well-received quarterly report. It’s definitely worth watching.
