WHAT TO DO NOW: Remain defensive. There’s been plenty of volatility in recent weeks, but nothing has really changed with the market (trends are down) or our stance (highly defensive). We’re not heading to our Panic Room, though, as a strong rally from here could actually produce a Cabot Tides buy signal. But right now, we continue to advise holding plenty of cash, remaining patient and building a Watch List of potential new leaders that can make big moves once this downturn finishes up. In the Model Portfolio, we have no changes tonight (though we have TDOC on a tight leash), with three stocks and a cash position of around 76%.
Current Market Environment
The market continued its recent weakness today with the Dow losing 206 points, while the Nasdaq receding 64 points.
The market has been all over the place during the past two to three weeks, first plunging to new correction lows in late October, then rallying strongly over seven trading days (recouping 40% to 60% of the October declines, depending on the index), and now, during the past week, falling sharply again and denting some recently-strong names.
Still, despite the wild action, not much has really changed in the market’s overall picture: The intermediate- and longer-term trends of most indexes and potential leaders are still pointed down, which argues for a defensive stance.
On the flip side, you also shouldn’t stick your head in the sand, either. If we see a few days from here, it’s possible our Cabot Tides could turn bullish. Plus, even after some sloppy action during the past week, we’re still seeing many potential leading stocks hold up very well.
As for secondary indicators, our Real Money Index returned to positive territory last week as investors continue to yank money out of equity funds and ETFs. And some longer-term measures (cash positions held by funds, institutional investors’ view of next year’s economy, etc.) are also becoming intriguing. Consider them minor positives.
All in all, should we see the market show some real strength that turns our Cabot Tides positive (again, it would likely take at least a couple of strong up days from here), we’ll likely buy a couple of positions in the portfolio and then take it from there. But you know how we do things—we don’t anticipate signals, and right now, the weight of the evidence remains negative, so we’re sticking with a defensive stance.
In the Model Portfolio, we’ve been highly defensive for weeks now, and we’re staying that way tonight—we’re sticking with our three stocks and a cash position of around 76%. Going forward, we might tweak things a bit, possibly replacing TDOC if it doesn’t shape up, but tonight we’re standing pat.
Model Portfolio
Five Below (FIVE 123) remains in good shape, with a reasonable (given the market environment) 20% correction in September and October, and with the stock holding well above its late-October lows during the selloff of the past week. We’ve noticed many retail stocks holding up well recently, which could be an early sign of leadership—though it’s also possible this group is the next target for the bears, who have been rotating through sectors in recent weeks. Still, in total, FIVE is holding well and we think it has as good a chance as any name to be a leader of the market’s next sustained uptrend. We’re leaving it on Buy, but keep new positions small and try to enter on weakness. BUY.
Okta (OKTA 55) is approaching its October lows and its 200-day line (both around 51), which is similar action to the overall market in recent days. For all the reasons we’ve outlined in recent weeks (an advance that only lasted a few months, a unique position in its security niche), we still think OKTA has another leg up left in it down the road. But in the short-term, we’ll just let the stock tell its own tale—a decisive drop below its 200-day line will have us bailing out, but above there, we think the stock has a good shot at building a healthy launching pad. HOLD.
Teladoc (TDOC 57) is definitely the weakest of our three stocks, edging below its October lows and, today, testing its 200-day line. One small positive (or non-negative): volume during the past few days down has been well below average, a sign that the selling pressure is drying up a bit. Still, we’re keeping our remaining shares of TDOC on a very tight leash—if they don’t hold up here, we’ll likely move on, thinking the stock’s chances of righting itself during the next uptrend are diminished. Hold for now. HOLD.
Watch List
Canada Goose (GOOS 64): GOOS has been consolidating since June and had a nasty shakeout last month, but it held its long-term 200-day line and, today, exploded to new highs after a great quarterly report. We’ve long thought the stock could be another Michael Kors-type winner (high-end retailer that bursts on the scene).
Ciena (CIEN 33): CIEN continues to behave completely normally, actually breaking out of a legitimate base during the market’s recent seven-day rally and pulling back grudgingly since. The firm is looking like one of the better ways to play the emerging 5G infrastructure buildout.
Dexcom (DXCM 139): DXCM is resting normally just shy of its all-time highs after a solid post-earnings advance. While competition remains a factor, there’s no doubt the firm’s G6 continuous glucose monitor is meeting with huge demand, and sales to Medicare and Medicaid patients, as well as further international expansion, should continue to goose business next year.
Etsy (ETSY 48): Etsy’s online marketplace for homemade goods dominates the industry, which, along with a recent price hike and tons of site-improving investments, is leading to accelerating sales and cash flow growth for the company. The stock briefly spiked to new highs after earnings before pulling back into its base.
Exact Sciences (EXAS 68): EXAS is one of many stocks that approached new high ground last week but has taken a hit since. Still, net-net, the stock is still in the middle of its basing structure and the growth story is as big as ever.
MongoDB (MDB 72): Similar to EXAS, MDB has been smacked around a bit after nosing to new highs last week, but isn’t in bad shape overall. There are some takeover rumors, but we’re focused on the firm’s disruptive, new-age database offerings that are huge hits among all sizes of companies.
Tesla (TSLA 344): TSLA has barely pulled back during the past week, adding another piece of evidence pointing toward the stock having bottomed in October and ready to start a new uptrend once the market gets going. Earnings estimates for next year keep crawling higher (now $6.17 per share).
Twilio (TWLO 84): TWLO boomed on earnings last week before the predictable retracement back into its basing structure this week. Twilio’s communications platform is pervasive, and as we mentioned last week, we see the stock as an emerging blue chip of sorts.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Tuesday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
