WHAT TO DO NOW: Practice patience. The market has recovered well from its January–February slide, but after forming a V-shaped bounce, the major indexes have stalled out over the last few days. It’s likely that markets will need a while to catch their breath, and we don’t want to get ahead of them. In the Model Portfolio, while we are close to recommending new buys, we want to have the Cabot Tides at our back when we do so. We have no changes tonight.
Current Market Environment
Markets were volatile today, with the major indexes in the black until a steep afternoon slide sent them to narrow losses for the day. At the close, the Dow was down 167 points and the Nasdaq shed 16 points.
There’s no doubt that the market’s recovery from its 11%, two-week correction has been encouraging—all of the major indexes we track have recouped at least 60% of their waterfall declines, with the growth stock-heavy Nasdaq leading the way, recovering nearly three-quarters of its meltdown. In fact, there’s no question the Nasdaq is now the leading index, which bodes well for our kind of stocks.
That said, we can’t conclude that the intermediate-term trend has turned back up. While the Nasdaq is well above its key 50-day moving average, the other four indexes we track are either a bit above or a bit below their 50-day lines. Thus, our Cabot Tides are basically neutral at this point, and our Two-Second Indicator is in a similar boat—it’s shown a lot of improvement during the rally but no all-clear signal yet.
Combined with our bullish longer-term outlook (Cabot Trend Lines are firmly positive), it’s a glass half full/half empty situation. Clearly the rally off the lows and the action of individual growth stocks bodes well when looking down the road (we think we already own two or three leaders of the next leg up), but until the major indexes confirm a new uptrend, many good-looking stocks can go bad in a hurry. And there’s nothing that says the market can’t retest the lows.
All in all, we don’t think it’s a time to be overly defensive; if you were knocked out of most of your stocks during the decline for whatever reason, nibbling on two or three strong stocks makes sense.
But if you’ve been following along with us and are about 60% invested (give or take), we advise remaining patient until we see added bullish confirmation from our timing indicators (specifically the Cabot Tides). The way things are setting up, there should be many strong growth stocks to sink our teeth into when the time is right—but right now, we think it’s best to wait for confirmation of the uptrend by the Cabot Tides.
Model Portfolio
Alibaba (BABA 189) has had a lot of ups and downs during the past few months but hasn’t made much net progress either way. Our thoughts remain the same—BABA still looks like a liquid leader, hasn’t done anything wrong and is sitting just under its November–January resistance, so we think the next sustained move is up. But until we see the buyers take control, we’ll stay on Hold with a mental stop in the high 160s. HOLD.
Facebook (FB 178) is acting more suspiciously, with a weaker bounce in recent days and little net progress since last July. Even so, we’re just following our plan, holding the stock above its longer-term support areas (low-160s or so) and seeing if buyers return. Last week, one analyst jumped back on the bandwagon, thinking the stock’s valuation is reasonable and Messenger monetization in 2018 (along with traditional Facebook and Instagram) should keep growth humming. If you have a good longer-term profit, we advise hanging on. HOLD.
Five Below (FIVE 66) hasn’t been super-vibrant in recent days, but we think the action is normal overall, with the stock in its seventh week of building a new launching pad. There’s still no set date for earnings (likely out in early March) but we have no reason to believe the firm’s steady growth and outlook have changed; the company’s new long-term goal of 2,500 stores looks achievable over time, albeit with some investment in new distribution capabilities. A break into the upper 50s would be worrisome, but right now, we’re comfortable holding our shares and giving the stock room to breathe. HOLD.
Grubhub (GRUB 97) continues to bask in the glow of its outstanding quarterly report (and major deal with and investment by Yum! Brands) two weeks ago, ratcheting to new highs in recent days. Analysts see earnings up 38% this year and another 31% next, but that could prove low if management keeps pulling the right levers. Obviously, GRUB could pull back a few points (especially if the market does), but there should be plenty of support on dips barring a complete market collapse. BUY.
PayPal (PYPL 77) is hanging right around its 50-day line—not great action, but not bad, either. Overall, the stock has etched a few higher highs and higher lows since Thanksgiving, and like BABA, we still think the fundamentals are enticing and next big move is up. We’ll continue to sit tight with our remaining shares, though a break of the 70 area would be a red flag. HOLD.
If you have a lot of cash on the sideline, we wouldn’t argue with nibbling on a few shares of ProShares Ultra S&P 500 Fund (SSO 111) here given the strong rebound from the S&P 500 in recent days, especially when you consider the longer-term trend is still up. However, we sold a chunk two weeks ago in the market plunge and, since SSO is still battling with its 50-day, our official rating will remain on Hold until the Tides turns positive. HOLD.
Shopify (SHOP 133) has clearly resumed its role as a leading glamour stock, holding up very well during the market’s dive and then catapulting to new highs on excellent volume yesterday, thanks in part to another great earnings report. In the fourth quarter, sales rose 71%, earnings of 15 cents per share were triple estimates, and management’s 2018 revenue outlook easily topped expectations. The sub-metrics were also great, with good tidings from the firm’s Plus subscription offering (for larger customers) and with gross merchandise volume rising 65% in the quarter. (This week, Snapchat’s Shopify-powered e-commerce store sold out of Nike’s Air Jordan shoes, leading many to believe Snapchat’s operations could be another big opportunity for Shopify.) Shopify announced a 4.8 million-share secondary offering today with a share price of 137, which makes the offering worth nearly $658 million. The stock pulled back from yesterday’s high, but stayed in its recent range. As with GRUB, SHOP is extended to the upside, but the upside power is impressive. We’ll stay on Buy, but try to buy on dips. If the stock digests the secondary offering in good order, we’d like to add more shares to our position. BUY.
Splunk (SPLK 93) is the third of our names to have recovered to new high ground during the market’s rebound; it’s one of many software stocks to do so, making software an early candidate to be a leading sector of the next leg up. The only trick here is the quarterly report, which is due out March 1 (next Thursday). We’ll stay on Buy, but keeping new positions on the small side makes sense ahead of the report. BUY.
Watch List
There are many vibrant growth stocks out there, so we’re busy building a big Watch List of names to potentially pounce on when our Tides turn up.
Atlassian (TEAM 55): TEAM is a unique cloud software company that is trying to do for team productivity what Microsoft Office did for personal productivity years ago. Sales and earnings growth are strong, and the stock moved out to new highs today after a three-month rest (which comes after a monster breakout last October). It’s a close call, but we will honor the message of the Tides and hold off on TEAM.
Ligand Pharmaceuticals (LGND 156): LGND is building a base-on-base formation, having found support near its 50-day line two weeks ago. Earnings are due out tonight.
Proofpoint (PFPT 105): It’s a bit thinner than we’d prefer, but PFPT has ripped back to new highs in recent days after a solid fourth-quarter report.
Pure Storage (PSTG 21): PSTG looks like the another in a long line of next-generation storage leaders that we’ve seen over the years. Revenues are growing rapidly, and the stock is near the top of a huge post-IPO base. Earnings are due on March 1.
Snapchat (SNAP 19): It got hit with a downgrade yesterday, but SNAP is holding the majority of its gigantic earnings move. It doesn’t have all the pieces in place (no earnings, etc.), but we’re intrigued.
Wayfair (W 96): Wayfair has always been a good business, selling house goods and furniture online. But the stock has been hard to handle, with short sellers active and wild swings the norm. However, the stock appears to have changed character, with 10 weeks up in a row starting in November, a modest dip during the market’s retreat and a spike to new highs in recent days. Earnings are due out tomorrow.
Workday (WDAY 126): WDAY has the makings of an emerging blue chip, with some of the best cloud-based software for human resources, finance and other departments. The stock is just getting going from a multi-year rest and has acted well during the market’s plunge and recovery. Earnings are due out on February 27.
