WHAT TO DO NOW: The market’s three-day rally has been solid, but even better than that has been the action of growth stocks, many of which have zoomed to new highs. Even so, our Cabot Tides remain negative. While a bit more strength could have us doing a little buying, we think our current stance (27% cash, lots of strong stocks) is appropriate for now. Our only change tonight is placing Twilio (TWLO) back on Buy. Details below.
Current Market Environment
The market had its third straight day of solid gains, though the indexes did fade a bit in the afternoon. At day’s end, the Dow was up 215 points while the Nasdaq had rallied 76 points.
When we look at the environment, what we’re seeing is really two different markets right now. First, concerning the major indexes, things have improved but have not yet returned to positive territory—all five major indexes we track have recouped a maximum of 40% to 60% of their early-May declines, but three remain at or below their key 50-day lines, while the S&P 500 and Nasdaq aren’t far above their own 50-days.
Thus, our Cabot Tides, while improving, are still on the negative side of the fence (though a good day or two could change that). While the big-picture trend looks fine (it’s still an overall bull market), the Tides tell us that, while there’s a chance the trade war-induced selloff will prove to be a brief shakeout, that’s far from certain at this point.
However, while the major indexes are in no man’s land, the action of growth stocks has been fantastic—many we own or watch actually raced to new highs today!
What’s our interpretation of it all? First, we take the action in growth stocks as very encouraging—the resilience seen in many of them during the market selloff, followed by the quick ramp, is a great sign that these leaders want to head higher over time. And given that a bunch of them rested in March/April, the action also tells us most of the weak hands have already been shaken out.
That said, we’re not going to ignore our market timing indicators just because growth stocks are doing well. With the intermediate-term trend still pointed down, there’s nothing that says this three-day bounce can’t fade.
Don’t get us wrong: We’re not pooh-poohing the three-day bounce. In fact, if you’re sitting on a huge cash position for whatever reason, we’re fine with putting some of it to work. But if you’ve been following along with our advice (the Model Portfolio is around 27% in cash), we’d just hang tight—we didn’t do that much in the way of selling during the sharp selloff to start the month, and we’re not (yet) going to do buying after a sharp rebound.
Going forward, should our Cabot Tides flip to positive, we will be looking to put money to work, with the most likely candidates found on our watch list. But given the evidence, we think our current stance (both cash position and our batch of strong stocks) is appropriate.
Model Portfolio
Carvana (CVNA 69) continues to have a great fundamental story, but the company is not the stock, and after more than doubling off its lows and with the market hitting turbulence, shares displayed some short- to intermediate-term abnormal action after earnings. We’re not ruling out taking another swing at the stock if it sets up a solid entry point in the weeks ahead—the Q1 report looked terrific and the massive-volume buying from February and March still points to higher prices down the road. (If you still own some and want to hold on, a stop near Monday’s low around 61 makes sense.) That said, the abnormal action had us taking a tiny loss on our half position on Monday’s special bulletin; we’re out and are holding the cash. SOLD.
Chipotle Mexican Grill (CMG 709) continues to handle itself in fine fashion, consolidating during the past few weeks centered around the 700 level (660 to 720 range since the start of April) and holding its 50-day line. A drop back to the lower end of the range isn’t out of the question if the market stages another sharp pullback, but the ability of the stock to hold its gains reinforces our view that the stock will likely head higher over time. Fundamentally, while there’s nothing revolutionary here, we think there’s solid potential in the firm’s new menu, digital initiatives (digital sales up 101% in Q1!) and new rewards program. Hold on if you own some, and if you don’t, we’re OK starting with a small-ish position here. BUY.
We took partial profits in Five Below (FIVE 127) on Monday’s special bulletin; obviously, the stock is being weighed on by the new 25% tariffs on many Chinese goods, and the prospect of further tariffs isn’t going to help. If you have a loss or a large position, tread carefully—FIVE’s good-looking breakout in April has failed, though interestingly, volume during the stock’s trade war selloff wasn’t that big. Bigger picture, we don’t think this news changes the firm’s underlying story; as we wrote last week, management thinks it can, over time, adjust prices and manufacturing. Thus, we’re happy to hold a solidly profitable, modest position (now around 6% of the portfolio) and give it time to find support. HOLD.
Okta (OKTA 110) remains one of the better looking growth stocks in the market, zooming to new highs in April, pulling back only to its 25-day line during the trade war scare, and pushing to new highs today (though volume was light). Earnings are due out in two weeks (May 30), which will obviously be key; as always, if you want to take a little profit ahead of the report, there’s nothing wrong with that. But we’ll keep it simple and just hang on, thinking OKTA looks like a real leader of the advance. New buyers should probably keep positions smaller than normal given the upcoming report. BUY.
Planet Fitness (PLNT 81) looks great, storming back to new highs after its one-day post-earnings shakeout (which has been a common theme with growth stocks this year) two weeks ago as investors continue to discount a very bright future thanks to quick growth in the store base and buoyant comparable location revenues (up double digits in Q1). We don’t think the stock is a great buy this second, especially with the market still iffy; if you don’t own any, we’d ideally look for dips back into the 76 area (the 25-day line is around 75 and rising quickly). But, bigger picture, the immediate snapback in the stock is a great sign the buyers are in control. BUY.
We left ProShares Ultra S&P 500 Fund (SSO 121) on Buy despite the Tides sell signal, based mostly on our studies that the first correction of a new bull phase tends to be relatively well contained (call it 4% to 7%, ballpark) in the S&P 500. And indeed, so far, the index’s maximum dip has been 5% (correlates to around 10% down in SSO, which moves twice the S&P, percentage-wise) during this downturn. Of course the key in that sentence is “so far”—with our Tides still technically negative, another wave of selling is certainly possible, and if it comes and the decline gets intense, we could go to Hold and even take some partial profits. But our main thought is that this is a bull market that should lead to higher profits down the road; thus, until “forced” to, we’re happy to hold our position. And if you don’t own any, we’re OK buying some around here. BUY.
Twilio (TWLO 142) looked very iffy on Monday, when it dove below its 50-day line on heavy volume as the market tanked. But the action since then has been eye opening, with shares exploding higher, capped by today’s massive move to new highs! The action is definitely a positive, no doubt about it; TWLO’s move reaffirms our view that the stock is one of the market leaders and, over time, will attract more and more big investors. If you own some, we advise sitting tight. The trick is what to do with our rating—we’re not ones to fight the trend, so we’ll go back to Buy, but if you don’t own any, we recommend getting in on dips following the run of the past few days. BUY.
Workday (WDAY 212) was close to the edge for us, but to its credit, it held support and leapt to new highs today. And, even better, the stock’s relative performance (RP) line did the same for the first time since late February. Overall, there’s not much to dislike about the action. It certainly looks like WDAY wants to resume its major advance, but we are going to keep our hold rating on for now, partly because of the market (Tides on the fence) and volume (just OK today), but mostly because WDAY reports earnings in less than two weeks (May 28). If you own some, just hang on. HOLD.
Watch List
Coupa Software (COUP 111): Cloud software stocks have been resilient this month, and COUP actually nosed out to new highs yesterday, albeit on subpar volume. Overall, we love this story and shares are trying to get going from a two-plus-month rest.
DocuSign (DOCU 55): DOCU is still something we’d be interested in buying if it can break out (above the 59 to 60 area) powerfully once the market returns to health. There’s some worries about competition with Adobe and some others, but there’s little doubt DOCU is well in the lead.
Qualcomm (QCOM 83): QCOM is facing a good “test” here—news last night that the White House is playing hardball with Chinese telecom firm Huawei, which is a big customer of Qualcomm, caused the stock to sell off today. If it can hold up from here, it would be a great sign QCOM will head higher down the road.
Roku (ROKU 83): ROKU is a wild performer, but it settled down in recent months, broke out on earnings and has held those gains during the market’s volatility. The firm looks to be the go-to play on the long-term trend of cord cutting and connected TVs.
