WHAT TO DO NOW: Remain cautious. Our Cabot Tides are still clearly negative, and in recent days the selling pressure has broadened out, causing more stocks and sectors to take on water. The longer-term evidence is still positive, so we’re not selling wholesale, but we have been paring back as the selling continues. In last night’s special bulletin, we sold half our shares of Workday (WDAY) and placed Twilio (TWLO) back on Hold. The Model Portfolio’s cash position now stands at 38%.
Current Market Environment
The major indexes finished modestly positive today, and growth stocks did pretty well on balance. At day’s end, the Dow was up 44 points while the Nasdaq gained 20 points.
The market correction has continued this week, with the major indexes losing ground and more stocks and sectors (the number of new lows on the NYSE and Nasdaq hit yearly highs yesterday) getting caught in the wash. Our Cabot Tides remain clearly negative, telling us the intermediate-term trend remains down.
Bigger picture, the longer-term evidence is still positive—the odds still favor this being a “normal” downturn that will lead to a new upleg—though the next little while will probably be telling. Looking at past times when the 2-to-1 Blastoff Indicator flashed green (as it did this year on January 9), the first correction generally lasted a month or two and took the S&P 500 down 5% to 9%.
In the current retreat, the S&P has declined for about a month, falling as much as 6.3% from high to low—still within the confines of what history shows is normal. Another couple of percent below the recent lows (call it a fall below 2,700 to 2,750, ballpark) would raise an eyebrow, and interestingly, such a move could coincide with a Cabot Trend Lines sell signal.
Consider that a general guideline to keep in the back of your mind, but you should still be taking things as they come. During the past couple of weeks, the evidence has worsened some, so we’ve continued to trim, mostly by taking partial profits—we sold one-third of our SSO position in last week’s issue and half of our WDAY in last night’s special bulletin, leaving us with 38% in cash.
Looking ahead, with solid deterioration in many sentiment measures (a good thing), many leading growth stocks still hanging in there and the correction fitting the “normal” pattern seen in prior blastoff environments, it wouldn’t surprise us if a new uptrend got underway soon, or at the very least, some repairing of the damage began.
But as we’ve written recently, the onus remains on the bulls to retake control—until our Cabot Tides show life and some leading growth stocks push higher, it’s best to remain mostly cautious as we patiently wait for sunnier days. That includes holding a good-sized chunk of cash, cutting back on new buying and keeping losers and laggards on tight leashes.
Model Portfolio
Chipotle Mexican Grill (CMG 678) took it on the chin last week after an analyst opined that earnings estimates would come down due to higher food costs in the quarters ahead (specifically pork, where big swaths of global supply have been ravaged by African Swine Fever). However, the company stated that pork makes up just a small chunk of its overall costs, and the firm actually saw higher pork prices a few years ago and was able to weather the storm. Really, we think the action is less about fundamental fears and more about CMG having had a good run this year, which, given the market environment, made it vulnerable to a whacking. We moved to hold last week to respect the action, though we’re pleased to see the stock hold support in recent days despite further market declines. Overall, we think this growth/turnaround story has a long way to run, so we want to give it plenty of rope—but, as we wrote last week, we’ll use a mental stop in the 620s so that we don’t give up all of our decent profit. HOLD.
We’re pleased to see Five Below (FIVE 129) show a little relative strength in recent days, including some big-volume buying last week, a higher low yesterday (even as the major indexes fell to new correction lows) and a pop today (thanks in part to a good earnings report from Dollar General). That said, it still has overhead to chew through and could be in the penalty box (go Bruins!) as the trade war drags on. We’re OK hanging on to our modest-sized position, but want to see some real strength before thinking the sellers have moved on. HOLD.
Okta (OKTA 107) has lost some upside momentum over the past couple of weeks, but that’s acceptable given the market environment; in fact, the stock is just a few points off all-time highs and hanging around its 25-day line, which is all to the good. That said, OKTA’s intermediate-term direction will probably be determined by tonight’s quarterly report—it’s possible we could take partial profits if we see a big negative reaction, but we’re optimistic Okta is a leader that many big investors want to own (or increase their position). We’ll stay on Buy, though we’ll be watching how the stock reacts in the days ahead. BUY.
Planet Fitness (PLNT 76) has finally been caught in the market’s downturn, with a sharp selloff last week on elevated volume and no bounce since. It’s still above its 50-day line, and nothing has changed with the story—there’s years worth of growth ahead thanks to rapid store growth and large increases in same-gym revenues. A drop below 73 or so would probably have us going to Hold (though we’d still be giving the stock some room to correct and consolidate), but right here, we’re OK picking up some shares on the dip if you don’t own any. BUY.
ProShares Ultra S&P 500 Fund (SSO 114) has remained under pressure with the S&P 500. Our take here is obviously the same as the overall market—intermediate-term, the trend is down, but longer-term, the trend is up and the evidence points to further gains. What would change our mind? Some of the stuff mentioned in the first section, specifically a sell signal from our Cabot Trend Lines, which would likely coincide with a deeper-than-expected retreat in the S&P (and other indexes). Right now, though, we’re comfortable having sold one-third of our stake last week and holding the rest—we still think this can be a low(er)-stress way to participate in what still appears to be a new bull phase. HOLD.
Twilio’s (TWLO 127) move to new highs two weeks ago turned out to be a fakeout, so we returned the stock to a Hold rating in last night’s special bulletin. And then after the close, the company announced plans to offer $750 million of stock in a secondary offering, which looks like a 4.5% to 5% dilution. The damage wasn’t bad today, though there’s no telling the stock’s reaction once the deal is finalized. Either way, we’re sticking with a Hold rating, though we’re planning to give our remaining shares (we took partial profits a couple of weeks ago) plenty of room to maneuver, thinking the stock’s rest period will lead to higher prices down the road. HOLD.
Workday (WDAY 208) is far from the worst chart in the market, but we decided to take partial profits yesterday (we sold half our position) for a couple of reasons. First, of course, the market remains in a correction, and we’ve seen increased evidence of resilient stocks starting to get the attention of sellers in recent days. Second, WDAY slipped on big volume despite a good report (revenue up 33%, earnings up 30%). And third, the stock, while making some headway, really hasn’t looked like a true leader in recent months; as of today it’s just a couple of points above where it was when March began. Don’t misunderstand us—we still think WDAY has solid potential and the company is clearly doing great. But given the entire picture, we decided to take some off yesterday, and we’ll use a mental stop in the upper 180s for the rest.
Watch List
Array Biopharma (ARRY 27): ARRY remains in great shape in the wake of last week’s data readout surrounding its two drugs used for certain types of colorectal cancer. Earnings are a ways off but revenues should grow rapidly from here. Interestingly, 508 funds owned shares at the end of March, up from 395 just three months before.
Coupa Software (COUP 110): COUP has earnings coming out soon (next Monday, June 3), which will tell the tale, but it remains perched near its highs and above its prior base (near 100). If it gets through earnings unscathed, we could take a swing at the stock during the next uptrend. The story (leader in business spend management software) is huge and pervasive.
DocuSign (DOCU 55): DOCU has been etching slightly higher lows during the past three weeks, even as the Nasdaq has slipped to lower lows. It’s doing what it “should” if it’s to become a leader of the next advance.
Roku (ROKU 93): ROKU is extended to the upside, but given what the market is doing, that’s a good thing. The company appears to be the neutral way (it doesn’t offer its own content, but a platform of everyone else’s) of playing the super trend of cord cutting and increased usage of streaming services.
Shopify (SHOP 277): SHOP remains very resilient, but still isn’t near an advantageous entry point.
Tandem Diabetes (TNDM 69): TNDM could be putting the finishing touches on a nice-looking 11-week base. We’re seeing more and more medical and biotech stocks act well, and we’re attracted to Tandem’s rapidly accelerating revenue growth.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, June 6. As always, we’ll send a Special Bulletin should we have any changes before then.
