WHAT TO DO NOW:
Remain cautious. Our Cabot Tides and Two-Second Indicator remain negative, but the market’s longer-term trend is still up and, encouragingly, many stocks are holding support. We think there will be some great opportunities down the road, but until the buyers retake control, it’s best to cut back on new buying and hold a good amount of cash on the sideline. In the Model Portfolio, we have 45% in cash and are standing pat tonight.
Current Market Environment
The market plunged at the open today but then saw a very encouraging rebound as the day wore on, finishing with solid gains. When the closing bell rang, the Dow was up 231 points and the Nasdaq had leapt 101 points.
Today’s rebound was encouraging, and ideally was the start of a big rally. But it’s too soon to say that—our Cabot Tides remain bearish (intermediate-term trend is down), with all major indexes below their 25-day and 50-day moving averages. And our Two-Second Indicator is still unhealthy, with the number of new lows regularly north of 40.
On the positive side, our measure of the market’s longer-term trend (Cabot Trend Lines) is still bullish, though admittedly the next week and a half will be key. And we continue to see the broad market show some subtle resilience; even considering the recent dip, the number of stocks hitting new lows has been far fewer on both the NYSE and Nasdaq compared to the February lows.
All told, though, most of the evidence remains negative, so we advise sticking with a cautious stance—holding plenty of cash, keeping new buying to a minimum and watching your remaining positions closely.
The daily headlines are catching everyone’s attention, especially the trade battle with China, causing many to wonder and speculate how bad this “trade war” might get. We’ll let others guess at that—just remember that investing based on the news is a very bad idea. The news doesn’t lead the market, it lags it. So keep your focus on the action of the market and leading stocks.
In the Model Portfolio, we came into today with seven stocks and a cash position of 45%, which seems about right given the environment. Tonight, we’re standing pat, as our stocks are holding support levels.
Model Portfolio
Five Below (FIVE 72) nosed out to new price highs a couple of days ago before easing back; overall, it looks ready to resume its major uptrend if the pressure comes off the overall market. We’re seeing some solid resilience in many retail names, which is also encouraging. (FYI, Ollie’s Bargain Outlet (OLLI) reports earnings tonight, and could have an impact on FIVE in the short-term.) Overall, we’ll stay on Buy, but as we’ve been saying, keep new positions small (around half your normal purchase, dollar-wise) given the market. BUY.
Grubhub (GRUB 100) remains in a correction that looks similar to the market, though today it found support today after kissing its 50-day line. The company announced this week that, in the first quarter, it expanded its delivery capabilities to 34 more markets across 19 states, part of its plan to expand delivery to 100 new markets this year, which will keep it miles in front of the competition. With our big profit (we’ve already taken partial profits), and with fundamental growth story being so lucrative, we’re likely to give our remaining shares of GRUB lots of room to consolidate if need be. HOLD.
HubSpot (HUBS 111) hit a low of 105 last Wednesday, and despite the market’s convulsions since then, has actually perked up a few points, which is a plus. Many of the strong cloud software stocks from February have been dented, but most are holding support around their 50-day lines, similar to HUBS. With a loss, we still have a relatively tight stop in place (102 to 103 area), but we’re OK with nibbling here if you’re not yet in. BUY.
PayPal (PYPL 75) has been slipping with the Nasdaq over the past three weeks, falling from a sub-peak of 84 down to 73 this morning. It’s not pleasant, but the stock really isn’t doing anything out of the ordinary (good or bad) and is still a few points above its 200-day line (unlike some major indexes). Fundamentally, we don’t think anything has changed; it’s likely earnings and cash flow can crank ahead at 20%-plus rates for many years. A drop below 70 would probably cause us to throw in the towel, but if you have a profit like us, we advise gritting your teeth and giving the stock a bit more room. HOLD.
Cybersecurity stocks remain very resilient, and we were pleased to see Proofpoint (PFPT 119) hold north of its 50-day line and bounce a few points in recent days. Like most stocks, it’s probably not out of the woods, but both PFPT and the sector are early-stage situations (just breaking out in February after years in the doghouse), so we’re optimistic buyers will continue to support the stock on dips. A recent study showed that more than half of organizations consider email fraud a top security risk, which plays right into Proofpoint’s hands. If you own some, sit tight. HOLD.
Shopify (SHOP 121) has certainly taken it on the chin, hit by the short-selling critique of a couple of weeks ago and, of course, the falling market. Still, the longer-term trend remains up, and until proven otherwise, we think the company’s business is in great shape. We have just a small position at this point (less than 4% of the portfolio) after our partial sell last week; we’re aiming to give the rest room down to its 200-day line (near 110). HOLD.
Splunk (SPLK 99) is another stock that has pulled back sharply, but is so far finding support near its 50-day line. With the major uptrend having just started around Thanksgiving, SPLK should have gas left in the tank. But as we wrote last week, we’re not going to let what was a decent profit turn into a loss. Thus, we continue to hang on, but with a tight stop in the 92 area. HOLD.
Watch List
Axon Enterprises (AAXN 42): It’s still thinly traded, but AAXN is showing great strength, having shot to new highs on excellent volume yesterday.
Continental Resources (CLR 59): CLR is a fast-growing, institutional favorite in the oil patch, and it’s sitting near the top of a 10-week base, which is part of a huge 15-month consolidation.
Etsy (ETSY 28): Etsy has basically gone straight sideways over the past three weeks and is still above its 25-day line. We think this niche online retail story could be a solid winner.
Floor & Décor (FND 56): FND is another thinly traded name, but its cookie-cutter story is outstanding and the stock ripped to new highs on good volume today.
Nutanix (NTNX 50): NTNX looks fine, having given up about half of its monstrous breakout move in February and early March before bouncing. We think this stock has emerging blue chip written all over it, though the stock could easily rest for a while longer.
Zillow (Z 53): Z’s retreat is a bit deeper than we’d prefer, but it’s done nothing wrong, has been orderly and we’re now seeing some big-volume support days show up.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Wednesday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
