WHAT TO DO NOW: Remain optimistic. The sellers finally showed up today, with some negative headlines causing the market to pull back. So far, though, retreats from the major indexes and leading stocks have been totally normal, and most of the evidence continues to point to higher prices ahead. In the Model Portfolio, we’re standing pat tonight with 35% in cash, though we’re spying a few names for possible new buying.
Current Market Environment
Reports that a U.S.-China trade deal was still a ways off, as well as news that Presidents Trump and Xi are unlikely to meet this month, helped the sellers gain an upper hand today. At day’s end, the Dow had lost 221 points while the Nasdaq slipped 87 points.
In the near term, some further selling wouldn’t be surprising. The major indexes have obviously had a big run, and this week most perked up toward their 200-day moving averages. In terms of secondary indicators, today’s AAII Sentiment survey (which changes a lot week to week) showed the fewest number of bears since last June, while, market-wise, more than 86% of NYSE stocks were above their 50-day moving averages on Tuesday, a very elevated reading.
Throw in our still-negative Cabot Trend Lines (longer-term trend is still down), and it’s possible the market could throw investors some curveballs in the days and weeks ahead.
Bigger picture, though, the evidence remains encouraging—our Cabot Tides are still clearly positive, and the major indexes could sustain a dip of 3% to 4% (depending on the index) and the intermediate-term trend would still be pointed up. It’s a similar story for the vast majority of growth stocks we’re following, which have had big runs and could easily digest those gains if they want to without damaging their uptrends.
Put it all together, and we remain increasingly optimistic on the market, though given the great run in recent weeks, picking your spots is important. In the Model Portfolio, we’re around 35% in cash, and it’s tempting to do a little more buying here, but we’re going to stand pat at least for tonight, for two reasons.
First, as we just wrote, the market (and, more important, individual stocks) could easily hesitate in this area, especially as many companies are set to report earnings over the next week or two. And second, while all of our stocks are acting fine, three (CIEN, PLNT and EXAS, which is newer) are showing us no profits or tiny losses. We’re not worried, but we’d prefer to have one or two of them get going before throwing down another chunk of cash.
Model Portfolio
As we just wrote, we’re about even on Ciena (CIEN 37), as the stock got knocked on a downgrade last week and has been consolidating since. While we’d obviously prefer the stock to be moving higher, the current three-point retreat from its highs looks normal compared to the prior nine-point advance. A drop all the way into the lower 30s would be abnormal, but, while a bit more weakness could easily come, we think CIEN’s next major move is up. Hold on if you own some, and if you don’t, we’re OK buying some here. BUY.
Exact Sciences (EXAS 87) has pulled back since our recommendation a week ago, though the stock looks fine—it’s still well above its breakout level (79-80) and is consolidating its prior run normally. Earnings will be released two weeks from today (February 21), which will probably tell the intermediate-term tale. Despite today’s fall, EXAS’ uptrend looks good to us—we’re OK buying some here if you’ve yet to take a position. BUY.
Five Below (FIVE 126) can get pushed around by U.S.-China trade rumors, but we’re actually impressed the stock was basically flat today despite a couple of bad news items on the trade front. All in all, FIVE looks to be calming down and is holding its entire late December/early January romp from 90 to 123. Frankly, another week or two of calm trading could set up a great entry point (and we may consider adding more shares to our position if that happens). Right now, though, we’ll stay on Buy, though aim for dips of a couple more points. BUY.
Planet Fitness (PLNT 58) has been a bit disappointing in that it attempted to break out on the upside twice in recent days (each on high volume), but failed both times, and now the stock is pulling in with everything else. Given that we bought the stock near the top of its base, we’re using a tighter-than-normal loss limit; a dip into the 53 area would probably be enough for us to cut bait. Still, we’re really not that worried here—the fundamental story remains pristine, the stock is holding above key moving averages and shares enjoyed a handful of huge-volume up days in January, a sign big investors are still active. We’ll stay on Buy. BUY.
ProShares Ultra S&P 500 Fund (SSO 108) can be bought right here. The combination of the panic selling in December, the 2-to-1 Blastoff Indicator in January, the Cabot Tides green light two weeks ago and the overall action since the low (huge progress, few pullbacks) is a strong sign the market is on firm ground overall. Yes, the bearish Cabot Trend Lines are still a fly in the ointment, one that we won’t ignore, but that’s just about the only piece of evidence right now that’s cautionary. We’ll stay on Buy—and if we do get a Trend Lines buy signal in the weeks ahead, we may consider buying a few more shares. BUY.
Twilio (TWLO 110) and Workday (below) are perfect examples of keeping your perspective. For TWLO, shares romped a whopping 41 points (!) from their December low to this week’s high, and have pulled back only eight points so far; the 25-day line is down around 102. In other words, this retreat barely registers on the stock’s chart, at least so far. That said, the next major move is likely to come down to earnings, which are due out next Tuesday (February 12)—analysts are looking for revenue growth of 61% and earnings of four cents per share. Equally important will be the 2019 outlook, especially with the Sendgrid buyout being completed. Just going with the evidence today, TWLO continues to look like a leading glamour stock, so we’ll stay on Buy—but new buyers can consider keeping positions smaller than normal given the upcoming quarterly report. BUY.
Workday (WDAY 187) is another stock with only a mild pullback during the past two days after a solid run, both since the Christmas low and even during the past week. Cloud software stocks are by far the strongest group in the market, and WDAY is one of the liquid leaders in the group. Earnings are due out February 28 (three weeks from today). Hold on if you own some, and if you don’t, you can buy a half position here or on further dips. (We may aim to fill out our position on further weakness, in fact.) BUY A HALF.
Watch List
Coupa Software (COUP 92): COUP has been a moonshot, with extraordinarily impressive price and volume action. Throw in a story that’s easy to grasp (and love), and we’re keeping an eye on the stock for a lower-risk entry point.
Dexcom (DXCM 144): Old friend DXCM has been tossed around in recent months by the market and the occasional competitive fear, but it’s finally setting up nicely. The firm’s G6 continuous glucose monitor is driving big growth, and big investors are believers—the number of funds owning shares has risen from 669 to 757 to 885 during the past three quarters.
LendingTree (TREE 307): Our only issue with TREE is trading volume, as many days, the stock only trades $3 million to $6 million over the first couple hours of the trading day. Even so, the fundamentals here are outstanding, as is the growth, and the stock remains in great shape after its long bottoming effort and strong upmove to start the year.
Okta (OKTA 81): OKTA is another stock that looks like a real leader of this market, with a powerful, unique cybersecurity story, fantastic growth and a stock that is super strong.
PayPal (PYPL 91): PYPL stumbled a bit on earnings, but we’re still watching it—the core story remains intact (20%-ish earnings growth) and the stock is within shouting distance of all-time highs.
Zscaler (ZS 48): We still prefer OKTA to ZS in the (very) broad cybersecurity space, but there’s nothing wrong with this name, which has perked up to new highs within the past week.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, February 14. As always, we’ll send a Special Bulletin should we have any changes before then.
