WHAT TO DO NOW: Remain optimistic. The market remains in good shape, though near-term, pullbacks and potholes are possible given the big run and the fact that we’re finally seeing a few leaders hit resistance. But the intermediate-term trend is up, the longer-term trend is on the verge of turning positive and more blastoff-type signals are being flashed. Long story short, we think the market will go higher over time, though we’re wading through a bunch of earnings reports on our stocks in the next couple of weeks. We’ll stand pat tonight with our cash position of 24%.
Current Market Environment
At day’s end, the Dow had lost 104 points while the Nasdaq slipped 29 points.
The bulls remain in control, with the major indexes and most leading stocks acting well. Not surprisingly, after good runs, we have seen some individual stocks begin to take a breather, and we’ve also seen a few poor reactions off of earnings. Given the fact that the market has just had a big eight-week run, it’s fair to expect some potholes here and there going forward.
But when stepping back, the big picture continues to look very bullish. Our Cabot Tides remain solidly positive, and if the S&P 500 and Nasdaq close Friday north of 2,745 and 7,445 (respectively), our longer-term Cabot Trend Lines will flip to bullish at week’s end. (That’s still a big if—we don’t anticipate signals.) Beyond that, the tremendous breadth of the post-Christmas rally continues to produce some rare green lights.
We’ve previously written about our 2-to-1 Blastoff Indicator, which flashed in early January and proved very prescient. Then, last week, more than 90% of S&P 500 stocks closed above their 50-day line; when combined with the fact that the S&P 500 itself has been below its 200-day line in recent months, that’s generally led to solid returns in the months ahead.
Moreover, yesterday, a broader 90% signal flashed—90% of all NYSE stocks closed above their 50-day lines. According to The Chartist, who came up with the indicator (as far as we know), there have been just 11 prior signals since 1970; on average, the S&P 500 is up more than 13% six months later, with all instances up three, six and 12 months after the signals. Whatever your favorite blastoff indicator, the main point is that many signposts point toward the market being nicely higher a few months down the road.
Of course, that doesn’t mean we can’t see (a) a short-term market-wide dip, possibly a sharp one to reintroduce some fear, and/or (b) some rotation, with the leaders of the past few weeks pulling back while other areas (energy, financials, etc.) garner attention. Said another way, our big-picture bullish view doesn’t mean there can’t be some pain, especially if some stocks get hit on earnings.
Still, there’s no question the evidence is mostly bullish, so your portfolio should be positioned that way, too. We may put some more money to work in the days ahead, but tonight, we’re going to stand pat, holding our 24% cash position.
Model Portfolio
Ciena (CIEN 42) has come back to life during the past couple of weeks, with shares spurting to new highs on solid volume. Earnings are due out March 5, plus there’s an industry conference that same day, so the stock is likely to be volatile. But there’s no question that the buyers are in control, and we continue to think the firm’s leading position in 5G and data center connectivity markets will drive great earnings growth for many quarters. We’ll stay on Buy, though dips of a point or two would mark better entry points. BUY.
Exact Sciences (EXAS 83) has been our worst performer—the stock didn’t make much progress after our recommendation, and in recent days, the sellers have shown up. The overall chart still looks decent (EXAS is above its breakout point near 80 and its 50-day line near 76); so far, this decline looks more like a reasonable shakeout than major distribution. That said, the quarterly report, which is due out after the close, will probably tell the tale—a close below the mid 70s would be a red flag, while a rebound would obviously be encouraging. We’ll stay on Buy here given the overall evidence (including the very bullish fundamental outlook), but we’ll be watching the stock’s reaction in the days ahead. BUY.
Five Below (FIVE 130) continues to act fine as it begins to test its old high around 135. Like many stocks (and indexes) that have enjoyed big comebacks during the past two months and are running into some resistance, dips wouldn’t be surprising, especially with FIVE’s earnings likely to be out in early- to mid-March. Still, the path of least resistance is up; we’ll stay on Buy, but you should try to buy on dips. BUY.
Okta (OKTA 82) has slipped recently with most leading stocks, but the current dip toward the 25-day line (now nearing 81) is more than reasonable. Yes, shares could easily retreat further, especially if growth stocks cool off, but we’re OK buying a half-sized position here if you don’t own any. If you own some, sit tight. BUY A HALF.
Planet Fitness (PLNT 58) has been probably our second-worst performer to EXAS, though it hasn’t done anything bad—shares have simply meandered sideways since the five-day, huge-volume run in the first part of January. Earnings are due out next Tuesday (February 26), which will likely make or break the stock on an intermediate-term basis. Given the stock’s great story, longer-term uptrend and tight trading action, we’re sticking with our Buy rating, but you should keep new positions on the small side given the upcoming quarterly report. BUY.
ProShares Ultra S&P 500 Fund (SSO 113) has done excellently and, as we wrote in the intro section, we think it will continue to do well in the months ahead as the market works its way higher. As with everything else, a pullback wouldn’t be surprising, though we’re not expecting a sharp dip (more like a few points if one comes), as retreats in the major indexes following blastoff signals tend to be relatively tame. In fact, if our Trend Lines turn positive, we could even average up again in SSO; for now, though, we’ll sit tight with our position. BUY.
Twilio (TWLO 113) has been all over the place since its earnings report, with a sharp post-report dip, a bounce that brought record closing high yesterday and then another decline today. Overall, the chart is fine (it’s still above its 25-day line, now near 108 and rising), and if anything, the firm’s Q4 report has us more convinced that the company’s communications platform is going to be very, very big. Same-customer revenues leapt a whopping 47% from a year ago, one of the largest numbers we’ve ever seen for a good-sized operation and the figure actually accelerated from prior quarters. If you own some, hang on, but the recent up-down-up-down action probably tells you to expect some further wiggles in the days ahead. BUY.
Workday (WDAY 189) will release its quarterly report next Thursday (February 28), which will obviously be key. That said, all of the action from the stock over the past few months (not to mention its fantastic sales and earnings growth) points toward the stock being a liquid leader in what is probably the strongest growth sector out there (enterprise cloud software). We filled out our position last week and will stay on Buy—though, as always, new buyers should keep positions with earnings approaching fast. BUY.
Watch List
Chipotle Mexican Grill (CMG 601): We think CMG looks like a liquid leader of this advance, and a powerful turnaround situation to boot. We already have two retail plays (FIVE and PLNT), though CMG might be different enough (dollar stores vs. fitness centers vs. restaurants) that we could fit them all.
Coupa Software (COUP 92): Coupa has shown mouth-watering price and volume action over the past few weeks. When combined with its easy-to-understand and pervasive offering (the go-to platform for business spend management), we think COUP is a leading glamour stock. Earnings are due March 12.
LPL Financial (LPLA 77): LPLA looks like the top Bull Market stock right now, and there’s every reason to expect business to surge as more retail players look for advice (LPL has more than 16,000 advisors) and trading (LPL is the largest independent broker-dealer). The stock is holding up very well after an earnings-induced breakout.
MongoDB (MDB 103): MDB is strong, but has been hard to handle and the upmove of the past month has come on little volume. It’s worth keeping an eye on for a proper setup, though, given its rapid growth and potentially huge story (new database platform for business of all sizes).
Xilinx (XLNX 119): XLNX may be the top institutional-quality stock right now, as it’s been marching higher with next-to-no pullbacks along the way. The stock has some overlap with CIEN, but the two don’t trade similarly. A shakeout of a few points would be very tempting.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, February 28. As always, we’ll send a Special Bulletin should we have any changes before then.
