WHAT TO DO NOW: Be cautious. The selling pressure has spread to the rest of the market, with the recent decline cracking a bunch of stocks and causing our Cabot Tides to turn negative. That said, we’re not super bearish (longer-term trend still up, fair number of stocks acting well), but we continue to think making any real money is very difficult—hence, we advise holding plenty of cash and cutting back on new buying. In the Model Portfolio, we sold Blackstone (BX) and Teladoc (TDOC) yesterday, leaving us with around 54% in cash. We’re also placing ProShares S&P 500 Fund (SSO) on Hold.
Current Market Environment
The market enjoyed a solid bounce today, with the Dow gaining 122 points and the Nasdaq rallying 87 points.
As we wrote in last week’s issue, while the major indexes had been acting decently in recent weeks, the evidence under the surface wasn’t so great—any stock near its high was stagnating or hitting an air pocket, while many of this year’s leaders remained on the mat. Simply put, no real money was being made despite the uptick in the indexes.
And now you see the result: With the buyers nowhere to be found, the sellers have flexed their muscles, turning our Cabot Tides negative yesterday and smacking around most stocks.
Thankfully we listened to the message of individual stocks during the past month—while we did nibble on two stocks that didn’t work out, our cash position never dipped below 34%. And during the past few days we’ve done some selling (CVNA last week, and BX and TDOC yesterday) to push the Model Portfolio’s cash position north of 50%.
Looking ahead, it’s important to keep an open mind. In fact, we actually think there’s a decent chance we’re in the midst of the third (and final) leg down in this five-plus-month rolling market correction—May came out of nowhere, August marked the top of many growth stocks, and now some out-of-the-blue bad news items (possible capital controls, impeachment, manufacturing recession) have many throwing in the towel.
Of course, we’ll just take things as they come. At day’s end, the predominant trend of the major indexes has been sideways, and the onus is on the buyers to step up and produce some persistent buying pressures (not just a day or two) and upside breakouts.
Thus, the plan going forward is simple: If/when the Tides turn positive and growth stocks get moving, we’ll put money to work. If the market and individual stocks chop around, we’ll likely stand pat. And if the selling pressures accelerate and our Cabot Trend Lines (still positive but approaching the fence) turn negative, we could become outright defensive.
Tonight, though, we’re standing pat.
Model Portfolio
Like many stocks, Blackstone (BX 47) went from hero to zero during the past couple of weeks. The reason for the selling (and its private equity peers) isn’t obvious, though it probably had to do with a combination of the WeWork disaster (which has people ratcheting down their valuations of other private outfits that firms like BX own), tightening credit (junk bonds are getting hit) and, of course, the falling stock market—BX, at its heart, is a Bull Market stock, so when the trend turns down the stock often goes along for the ride. Bigger picture, we doubt BX has hit a major top; it just broke out in April, so it’s probably not late in its run. But we weren’t going to let our decent profit morph into a loss, so we took our small profit yesterday via a special morning bulletin. SOLD.
Chipotle Mexican Grill (CMG 816) has been all over the place during the past three weeks, but overall, the chart looks fine—the stock is essentially consolidating within 8% from its highs. Of course, if the sellers stay active, they could come around for CMG at some point, and there is tough resistance in the 850 area that could prove tough to chew through. But with the growth story very much intact and having already booked partial profits, we’re willing to give the stock room to breathe, possibly down to the 720 area if things get hairy. HOLD.
It’s hard to ignore Coupa Software’s (COUP 143) relative performance—today shares actually zoomed above their 50-day line on solid volume, pushing back into the middle of their 11-week consolidation. Of course, many headwinds remain, including the market itself, growth stocks and the still-weak action among most of its peers. But as we’ve written before, we’re willing to give our remaining shares a chance—the risk from here is down toward our stop in the mid/upper 120s (it tickled that level on Monday), but the upside if the market and COUP can get going is much larger than that. Continue to hold your shares, albeit while watching our stop. HOLD.
We think it’s likely that we already own a couple of leaders of the next advance, and DocuSign (DOCU 62) is one of them—the stock’s pullback during the latest market dive was completely normal, holding nicely above its 25-day line (a bit below 59) and only giving up the final one of four big post-earnings day gains. Like every resilient stock, it’s always possible the sellers eventually come around for DOCU, but so far, so good. If you don’t own any, we’re still OK grabbing some shares, but keep the position on the small side. BUY A HALF.
Inphi (IPHI 61) isn’t as strong as DOCU, but it’s another name that’s holding well; the stock’s overall correction, which began in mid-August, continues to look normal given the prior run. Also encouraging is the fact that many semiconductor stocks are acting resiliently. Remember, chip stocks made no progress from late 2017 through early 2019, meaning most already had the weak hands knocked out—IPHI just broke out of a two-plus-year base in July! We have a mental stop around 54 if the wheels really come off, but at this point, we advise sitting tight. Despite all the economic fears out there, it’s likely Inphi’s growth will be excellent HOLD.
Because of the new red light from our Cabot Tides, we’ll go back to Hold on ProShares Ultra S&P 500 Fund (SSO 123). But at least for now, we see the overall market trend as more sideways than down—our Cabot Trend Lines are still positive and the S&P has been chopping around since late April. Thus, we’re OK holding SSO here, though further weakness (could prompt us to take more partial profits) or a strong rebound (back to Buy) could change that. HOLD.
Snap (SNAP 14) has been going down a sinkhole during the past week, though it appeared to find some buyers at key support (14 to 14.5) before today’s bad news hit—Facebook is launching a camera-based messaging app called Threads, aimed for people to use with a smaller circle of friends than it would via Instagram. The produce didn’t exactly come out of nowhere (SNAP took a hit in August when rumors surfaced Facebook was working on Threads), but regardless, it fell sharply on the report … though, encouragingly, finished well off its lows after dipping below support near 14. Making a decision what to do is a tough one—the stock is right near our mental stop, but it’s already come straight down in recent days, the bad news is out and we already have a large cash position. Because of that, we’re going to hold SNAP tonight (today could have been a shakeout), but it needs to find buyers right quick or else we’ll cut the loss. HOLD.
Teladoc (TDOC 64) was cut loose yesterday mid-day as the stock imploded below support on big volume. Looking back, we probably jumped the gun—oftentimes it’s actually safer to buy a bit higher (once a stock has decisively cleared resistance, in this case near 73) than getting a head start. Lesson learned. That said, we’re not taking our eye off TDOC, either—an analyst today revealed that Amazon’s new in-house virtual care offering for employees actually uses Teladoc’s platform, and while United Healthcare isn’t using Teladoc (yet) for its Medicare Advantage telehealth program, that has nothing to do with the prior deal between the two firms (announced in September) that should bring on another five to 15 million users for TDOC. With the stock and market under pressure, we still believe the best course is to cut the loss; there’s nothing that says the recent dip can’t get a lot worse. But it certainly looks like the story is still as enticing as ever, so it’s worth watching to see if it can find support and, during the market’s next uptrend, join the party. SOLD.
Watch List
Insulet (PODD 159): PODD is one of the few growth stocks that’s in an established uptrend, pulled back sharply in September but then powered back to its old highs. We think the firm’s Omnipod insulin pump system will power accelerating growth going forward.
MasTec (MTZ 63): If the market were healthy we might take a swing at MTZ here, as it’s chilled out for about a month as its 50-day line (now at 61) catches up. As it is, we’ll just continue to watch it.
Novocure (NVCR 75): NVCR has actually seen some subtle accumulation of late, though the price is still languishing. We’re looking for the stock to round out a new launching pad.
Pinduoduo (PDD 33): PDD took on water in September but has held its 50-day line and is bouncing. We think this is the kind of new, rapidly-growing story that could find a bunch of buyers during the next market upmove.
Shake Shack (SHAK 94) SHAK has only suffered two big-volume selling days since the start of September and has generally held its 50-day line, two rarities among growth stocks. We already own CMG, but we could buy a half position of SHAK if/when the market gets moving.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, October 10. As always, we’ll send a Special Bulletin should we have any changes before then.
