WHAT TO DO NOW: Remain bullish, but don’t get too aggressive. Growth stocks and the market are still in uptrends, so we’re sticking with a heavily invested stance, but many leaders have wobbled of late, the number of stocks hitting new highs has dried up a bit and earnings reports are coming up for a ton of names. Overall, we’re willing to move in either direction (buy or sell), but right here, we think our current stance (20% cash, some hold ratings, some buy ratings) makes sense as we see what earnings reports bring. We have no changes tonight.
Current Market Environment
The market sold off sharply today, led by growth stocks. At the close, the Dow was off 354 points while the Nasdaq was down 245 points.
After a harrowing selloff in growth stocks last Monday, buyers did step up for a few days, supporting the Nasdaq and growth titles while also pushing the broad market higher. However, not all was peaches and cream—the number of stocks hitting new highs on the Nasdaq has been easing a bit since early July, and even our Aggression Index, while still positive, has begun to weaken as defensive stocks pick up steam as the Nasdaq chops around.
Probably more important to us the action of individual stocks—while the Nasdaq returned close to its highs from last Monday, many stocks we own or are watching didn’t. And then today happened, with growth stocks (and most others) getting dented across the board. (We know there were reasons behind today’s selloff, like some antitrust action against Apple, but we’re more interested in the what than the why.)
None of this evidence is super bearish when looking out a few months; indeed, our key market timing indicators (Cabot Trend Lines, Cabot Tides, etc.) are still bullish, and next to no leading growth stocks have cracked their intermediate-term uptrends as of yet. Moreover, some sort of hesitation was going to come eventually, and as we wrote in last week’s issue, the current time frame (we had 16 weeks up with very strong performance) fits with prior instances where the sellers finally put up a fight.
But shorter-term, we’re not in the mood to chase stuff, as many stocks are wobbling and a ton have earnings reports coming during the next two or three weeks. Long story short, having trimmed last week, we’re content to stand pat tonight with a cash position right around 20% while holding onto our strong, profitable positions.
From here, we’re willing to move in either direction (buy or sell) depending on what comes, but right now we feel giving our names a chance to build new launching pads is the best course.
Model Portfolio
The debate over school reopening’s is raging across the country, but more and more seem to at least be starting out with a part-virtual option (with some going fully virtual for at least the first few weeks). That’s likely helping perception of Chegg (CHGG 75), which rebounded excellently from last week’s selloff, tagging new highs today before reversing (on light volume). Anything is possible, of course, but the trend is up here for the business and the stock. We’ll stay on Buy, though dips toward the 25-day line (near 70 and rising) would mark better entry points. Earnings are likely out in early August. BUY.
Cloudflare (NET 36) didn’t bounce all that well from its selloff last week, though that’s the short-term—overall, NET remains comfortably above its 50-day line (now at 33 and rising) and has held all of its huge-volume gains from late June. A break of the 50-day line could have us booking some partial profits, but so far, this looks like a normal (albeit tedious) drop following a big run. Hang on if you own some, and if you don’t, we’re OK grabbing some shares (small position given the upcoming quarterly report) around here. Earnings are due August 6. BUY.
Dexcom (DXCM 420) made up nearly all of its drop last week before today, which is an encouraging sign. Still, we tend to think that the upcoming earnings report (due out July 28 after the close) will tell the intermediate-term tale; analysts are looking for $415 million in revenue (up 24%) and earnings of 34 cents per share (more than quadruple last year’s figure). With the stock little changed from early May, we’ll stay on Hold and see what the report brings. HOLD.
DocuSign (DOCU 198) bounced on low volume in recent days and reversed today, though really, we can’t say the recent action is any sort of massive red flag at all—it’s still in a firm uptrend and is clearly above even its 25-day line (now at 187 and rising rapidly). Should the stock take a few weeks to catch its breath, it could offer up another high-odds entry point, but following its recent run, we’re content to just hold our remaining shares. HOLD.
Okta (OKTA 207) has lost a little momentum in recent weeks, which is one reason we took partial profits last Tuesday, and if the stock really broke wide open (back below 170 to 175 or so) we would probably take the rest of our profit. But we don’t think that’s likely—so far, the stock is still north of its 50-day line (196 and rising) and it appears to be starting a normal digestion following a giant run. Given that and its best-in-class growth story, we still think the next major move is up. For now, though, we’ll stay on Hold and see if OKTA can settle down and form a new base. HOLD.
ProShares Ultra S&P 500 Fund (SSO 137) isn’t the talk of the town, but it continues to make progress as the S&P 500 has squeaked out to new recovery highs, and that performance is even better as it comes after a couple of shakeouts (including a test of its 50-day line) in June. Of course, there will be further dips along the way, but with our trend-following indicators up and the blastoff measures from late May/early June in effect, we’ll stay on Buy, though entering after a couple of down days is usually your best bet. BUY.
Teladoc (TDOC 220) has a few yellow flags, including the fact that its latest advance has come on very light volume; its last above-average volume up day was back on June 19! Still, there’s no question the overall chart is positive (the bounce in the past few days has been stronger than many growth stocks), and the longer the virus is in the news, the greater (and quicker) the demand for comprehensive telehealth solutions. We’ll stay on Buy, but given that earnings are due next Wednesday (July 29), we’d keep any new positions small. BUY.
Twilio (TWLO 254) was whacked today, but this comes after a big-volume rush to higher highs, which came thanks in part to some bullish analyst commentary that the company is seeing a significant acceleration in business as new industries adopt its communications platform. As with most stocks, earnings are due out soon (August 4), and that will probably have a big impact on the near-term. Even so, while a pothole is certainly possible, we’d be surprised if TWLO truly gave up the ghost following earnings given its blastoff in May and status as a liquid growth leader. Given the evidence, our Buy rating stands, but any new buys should be kept small due to the upcoming report. BUY.
Wingstop (WING 139) briefly popped to new highs this morning before pulling in, but finishing in the black on a day like today is still a good thing. Stepping back, shares have bounced off their 50-day line, which is normal action, but next week’s earnings (July 29 before the open) will be a big factor. The path of least resistance is up, but risk management tells us to keep new positions small this close to a quarterly report. BUY.
Watch List
Bill.com (BILL 83): BILL has now rested for four weeks and tested its 50-day line during that time. A bit more time in here would be tempting, though the stock’s jumpiness isn’t ideal.
Datadog (DDOG 85), Peloton (PTON 62): We think both are glamour leaders of the bull move, but we’re OK waiting for better entries given their big runs and the fact that earnings are coming relatively soon (August 6 for DDOG, and likely right around then for PTON, too).
Inphi (IPHI 122): One of our favorite growth stories, Inphi has effectively rested for six weeks after a big run. Earnings are due out August 4.
PayPal (PYPL 174): We think PYPL is headed higher over time, though the trick is to get in at a good price. Earnings are due out July 29, and a shakeout/pullback on that could provide an opportunity.
Spotify (SPOT 268): SPOT remains the stock we’re pining after the most, though the sharp up/down action of the past week could be a sign that sellers are finally joining the fight.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, July 30. As always, we’ll send a Special Bulletin should we have any changes before then.
