WHAT TO DO NOW: Remain optimistic. Growth stocks have had a tough week, but the selling hasn’t been abnormal, few (if any) have broken down and today’s stabilization for many is a good sign. Moreover, the 90% Blastoff Indicator has turned green, which is a bullish sign for the overall market. Because of that, we’re adding a full position in the ProShares Ultra S&P 500 (SSO) Fund tonight, which will leave us with around 24% in cash.
Current Market Environment
The major indexes reversed lower today, with the Dow losing 148 points and the Nasdaq down 43 points, though many growth stocks stabilized after some sharp recent weakness.
The story of the past few weeks in the market was the divergence between growth stocks (most of which did amazingly well) and the rest of the market (OK, nothing great). The past week or so has mostly seen a reversal of that, with a tough rotation out of growth and into the broad market.
For the broad market, that’s obviously been a good thing—our Cabot Tides, which were on the fence a couple of weeks ago, are solidly positive, while the number of stocks hitting new lows remain very tame.
And the future looks bright as well. The 90% Blastoff indicator has given a Buy signal, as 90% of stocks on the NYSE closed above their respective 50-day moving averages at yesterday’s close. (Hat tip to The Chartist for this indicator, which it came up with decades ago.) It’s a rare signal, flashing just 12 other times since 1970, with the most recent being February 20, 2019. On average, the S&P rises a maximum of 20% over the next year, with minimal losses (just a couple of percent on average).
Of course, 2020 has been a rulebreaker year, so there are no sure things, but there’s no question the 90% signal is a very good sign and plays into the view that this is likely a fresh bull market that will head higher over time.
As for growth stocks, the past week hasn’t been fun, but all of what we wrote last night remains true: We’ve seen very little in the way of breakdowns or abnormal action, as most stocks that have been hit had mega runs during the past six to eight weeks. Thus, we’re mostly sitting tight, though we’re certainly not complacent, as we’re keeping a close eye on a couple of stocks and could hit the eject button if things get worse.
As for buying, we actually think the recent dip in growth stocks could provide some entry points if things stabilize for a few days. Tonight, because of the 90% signal, we’re going back into the ProShares Ultra S&P 500 Fund (SSO), giving us a foothold in what appears to be a new bull trend. After the buy, our cash position will be around 24%.
Model Portfolio
ProShares Ultra S&P 500 Fund (SSO 121) is a leveraged ETF we’ve played many times in the past, including owning it earlier this year. Leveraged funds can occasionally get wacky, but SSO generally does a good job of moving twice as much as the S&P (up or down) each day, or close to it. While there are never any guarantees, the 90% Blastoff signal is a very good sign, so we’ll go ahead and add a full (10% of the portfolio) position in SSO tonight; we’ll use a 15%-ish loss limit on the position. As for SSO vs. other leveraged long index funds, we prefer getting the diversification that the S&P 500 provides (compared to the Nasdaq or Dow). BUY.
Chegg (CHGG 60) has gotten off to a rough start for us, but we think it’s fine. The timing on our half-buy was obviously not ideal, but it held above its earnings gap area even on yesterday morning’s nose-dive and has bounced well off those lows. We expect some further wobbles, but also think the next big move is likely up. BUY A HALF.
Chewy (CHWY 42) looked like it was toast yesterday morning, but it closed back above support (in the 38 area) and its 50-day line (now near 39.5) and stretched higher today. CHWY is closest to the edge for us; at this point, a close below the 38.5-39 area would probably have us getting out. Overall, the stock appears to be etching a new launching pad following its huge March-April upmove, so after three shakeout attempts, we’re willing to see if the stock can finally get moving. We’re holding our half position with a tight leash. HOLD A HALF.
Cloudflare (NET 28) has been a wild mover in recent weeks, but interestingly, its action during the recent growth stock selloff hasn’t been bad at all—shares did dip but held within their post-earnings range and bounced nicely off their 25-day line. Fundamentally, we think this story has the rapid/reliable growth profile that will attract a ton of institutional investors over time, so we’re eager to fill out the rest of our position—but we’ll hold off a couple more days to see if growth stocks have found a low. Hold on if you own some, and if not, you can start with a half-sized position here. BUY A HALF.
Dexcom (DXCM 362) took a hit with everything else yesterday, but it found support near its 10-week line (near 340) and bounced today. Shares may need some time to digest their recent (broke out at 280 and ran to 425) and multi-month (original breakout in November of last year near 190) gains, but the major trends of the stock and business are still in good shape. HOLD.
DocuSign (DOCU 128) bounced back to within a few points of its high today, which is obviously a good thing. We still think DOCU has higher highs ahead of it, but the stock remains extended (the 50-day line is down around 104) and earnings are out a week from today (June 4). Thus, we’ll simply stay on Hold and see what the quarterly report brings. HOLD.
Okta (OKTA 184) has also snapped back nicely after yesterday’s test of its 25-day line. With the stock having emerged from a big consolation just last month, and with a security story that should result in years of 30%-plus growth, we’re optimistic OKTA can be a solid winner going forward. That said, the intermediate-term tale will be told tonight, when earnings are released—analysts are looking for $171 million in revenue and a loss of 17 cents per share, but things like bookings and the outlook will be even more important. We’ll stay on Buy but will be in touch with any updates post-earnings if need be. BUY.
Teladoc (TDOC 167) topped just above 200 back in late April and fell just below 150 at yesterday’s nadir, so ideally, that 27% correction is enough to have scared out some weak hands and set the stage for a new advance. The fundamental story certainly supports higher prices, as telemedicine usage and new member additions are booming. Still, we’re just playing this by the book—a dip into the low 140s would likely have us cutting bait, but having sat through this pullback, we advise giving your remaining shares of TDOC a chance to recover. HOLD.
Twilio (TWLO 191) had enjoyed a massive run, so its harrowing dip from 210 Monday morning to 177 yesterday morning wasn’t totally unexpected. Like many growth stocks that have enjoyed many weeks of buying, further pullbacks and more consolidation could easily be in order. That said, we still view TWLO as a liquid leader of this advance and, until proven otherwise, see dips as buyable. BUY.
Vertex Pharmaceuticals (VRTX 277) was close to being downgraded to Hold yesterday, mostly because shares hadn’t made much net progress over the past few weeks while many growth stocks soared. But then the stock tagged its 50-day line and ripped back toward its highs! If VRTX has another whoosh lower, we could follow through with a hold rating, but right now the stock continues to attract big investors on dips. We’ll stay on Buy. BUY.
Watch List
Coupa Software (COUP 217): COUP has emerged as the best-looking cloud software stock. The trick is that earnings are due out June 8. A consolidation for a bit longer could set up a nice entry point.
Datadog (DDOG 67): DDOG would definitely be a name we’d target if growth stocks rested for another couple of weeks. Its story, numbers and chart all point toward good things.
Inphi (IPHI 122): IPHI remains super strong, which is good, but it’s not near a solid entry point, which isn’t. Doesn’t hurt to keep watching though.
Peloton (PTON 43): We really like PTON fundamentally, as it quacks like a leading glamour stock. Shares got hit this week but the action is normal thus far.
Tesla (TSLA 806): After a crazy advance, decline and rebound in recent months, TSLA is tightening up beautifully. The turnaround story is very much intact, with huge earnings expected in the quarters to come.
Wingstop (WING 119): WING continues to trade tightly after a big comeback in March and April, which is constructive. Not only is this a great cookie-cutter story, it should also provide a little diversification to the Model Portfolio.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, June 4. As always, we’ll send a Special Bulletin should we have any changes before then.
