WHAT TO DO NOW: Remain defensive. Stocks are finally mustering a bounce today, though after the market’s meltdown of recent weeks, the intermediate- and longer-term trends remain firmly down. On a Special Bulletin last Thursday, we purged Exact Sciences (EXAS) from the portfolio, leaving us with just two stocks and a cash position of around 84%.
Current Market Environment
We wanted to make sure to stay in touch with our regularly scheduled update this week, though given that most people are likely hanging with family and catching up on some movies, we’ll keep this update relatively brief.
As we write this around 12:30 p.m. Eastern, the market is rebounding nicely, with the Dow up 440 points and the Nasdaq rallying 180 points.
Despite the rally, every major index remains well below all of its moving averages. With our Cabot Tides and Cabot Trend Lines firmly negative and with most stocks and sectors having effectively crashed over the past few weeks, we advise a defensive stance.
That said, there’s no question we’ve now seen some crazy extreme readings from a variety of oversold and sentiment measures—things that tend to happen once every decade or two and often (not always) occur near major lows. One of many examples comes from our own Two-Second Indicator, as coming into today, we had seen three straight days of greater than 1,000 new lows on BOTH the NYSE and Nasdaq (!), something that we’re not sure has ever been seen before. And as we write this, we’re again seeing huge numbers of new lows (770 NYSE, 634 Nasdaq) today.
Here’s how we read that: In the near-term, it’s growing likely the market will find a low to work off of. Maybe that occurred today, maybe it takes another few days of panic selling. But just looking at the odds, we very well could be approaching some sort of low.
On the flip side, we’re always on the lookout for unusual action, and if the market ignores these (and other) historic readings, it obviously wouldn’t be the best sign.
Going forward, if the market does bounce, it could be pretty powerful and (hopefully) last a few weeks given the size of the recent decline. But, again going with the odds, any rally from here is likely to be the start of a bottoming process (and maybe a retest or two), not necessarily a great time to buy (unless you want to play short-term swings).
Of course, it’s good to have some scenarios in mind, but we always go with what’s actually happening today, which clearly remains negative. Thus, we advise remaining in a defensive stance—we could always move a little one way or the other (maybe buying a potential leader if the market shows some real strength and we think a stock has hit its bottom), but we’re keeping the vast majority of our capital safe on the sideline until the trends turn up.
Model Portfolio
Exact Sciences (EXAS 57) tripped our maximum loss limit last week, which forced us to sell. We still like the story, but the latest slide pulled the stock to a lower low, below its 200-day line and the whole chart looks double toppy. That doesn’t mean it can’t repair itself going forward, but there are other growth stocks that (believe it or not) are far more resilient. SOLD.
Five Below (FIVE 95) did break support in the mid 90s last Friday, but it’s snapping back decently today; a push higher from here would raise the chances that the dip was a big shakeout. We are aiming to hold all or most (we could sell a portion if this bounce doesn’t stick) of our position, thinking FIVE hasn’t seen its final top for a variety of reasons (fundamental and technical) and that this dip will eventually prove buyable. HOLD.
Twilio (TWLO 82) has taken a big hit since early December, but we continue to think that, big picture, it remains in good shape—at its low on Monday, the stock was 10 points above its October low and two points above its November low, and today’s rebound (while just one day) took the stock above its 50-day line (as of lunch time), which is a rarity these days. Renewed weakness could always force us out (similar to EXAS), but we’re trying to hold on, as we still see TWLO as a stock that can be a big winner during the next round of buying. Hold on and see if it can continue to bounce. HOLD.
Watch List
Ciena (CIEN 32): CIEN gave up its earnings rally but continues to hold up well. We still think this stock can ride some rapidly growing areas next year.
Etsy (ETSY 44): ETSY’s decline is a bit more than we’d prefer, but we’re willing to watch it and see how it rebounds.
MongoDB (MDB 76): Many firms that are boosting others’ productivity remain relatively resilient, including MDB. It needs some work but continues to hit higher lows.
Okta (OKTA 57): OKTA’s closing low this week was around 54, compared to 48 in November, and support came in near its 200-day line. We think OKTA, along with ZS, represent some “new” cybersecurity plays that could lead the next advance.
PayPal (PYPL 80): PYPL has a consistent, growth-y business, has held its lows since early October and is only 14% off its high. Worth watching.
Trade Desk (TTD 107): TTD has fallen back to its October lows, but is still above its 200-day line. We still think this fundamental story is dynamite, so we’ll keep an eye on it.
Workday (WDAY 150): WDAY has been above its 50-day line for a month, which is basically unheard of. Like all stocks, it needs some work, but we continue to see WDAY as a potential liquid leader going forward.
Xilinx (XLNX 82): XLNX actually had a big rally from late October through November, and is only about 15% off that peak—making it just about the “strongest” growth stock out there.
Zscaler (ZS 38): ZS remains choppy but continues to build a normal-looking base. ZS is the kind of relatively new issue that could catch fire once the market bottoms.