Editor’s Note: Our offices will be closed starting mid-day Thursday to get a head start on some eggnog and finish off some wrapping, but we’ll be back at it on Monday. Have a great long weekend, and Merry Christmas for those who celebrate.
What To Do Now: Remain cautious. We’ve seen a few rays of light in recent days, and if that continues we could put a small amount of our 55% cash hoard to work as we attempt to position in some potential leaders of the next rally. Still, we need to see more than one or two good days to turn the Cabot Tides positive, so our main thought is to stay mostly safe, build a watch list and give our current crop of names a chance to hold up. We have no changes tonight.
Current Market Environment
The market is higher so far today, though volumes and volatility are already fading ahead of the long holiday weekend. As of 11 am EST, the Dow is up 177 points and the Nasdaq is up 98 points.
There’s been a lot of movement since our issue last week, first down and then back up, but the indexes find themselves in pretty much the same stance—longer-term, the market’s trend remains up (Cabot Trend Lines positive), but the intermediate-term trend is still down (Cabot Tides negative) and most stocks are having issues; even on the higher-quality NYSE, 53.4% of stocks came into today below their 200-day lines.
That said, in the near-term, we have seen some rays of light. First, there’s been a bit of resilience among growth stocks over the past couple of days—it’s nothing groundbreaking, but many growth-oriented funds and indexes retested their early-December lows last week and held up even during the selling since then.
Second, internally, we actually have seen a bit of improvement in the broad market: When the Nasdaq first plunged into early December, 732 names hit new 52-week lows (December 3). But on the retest of that low on Friday and Monday, “only” 438 and 423 stocks hit new lows (December 17 and 20), a positive divergence.
And third, sentiment continues to deteriorate—the 21-day average of the equity put-call ratio just matched its highest level since October 2020, with the prior two instances of similar readings this year (May and August) leading to some solid upside.
These indications are encouraging, though to be fair, they’re also secondary. If the market and growth stocks can show some positive action, we could put a little of our large cash hoard to work (the goal being to remain cautious overall (plenty of cash) but also positioning ourselves in potential leaders of the next uptrend), and of course if the Cabot Tides turn green and we see some solid growth stocks setups (not many out there today), we’ll put much more money to work.
Still, right now, we need to see more than a one- or two-day bounce in growth stocks to do anything—we’ve seen a couple of strong rallies this month only for them to go up in smoke a few days later. Tonight, we’ll sit tight with our 55% cash position and see if the market can build on some of the small positives mentioned above. We have no changes tonight.
Model Portfolio
Arista Networks (ANET) remains a rare bird, perched near all-time highs and above its mid-November peak, when growth stocks started their correction. Good stocks can always go bad in a hurry in bad markets, so we can never rule out ANET getting hit if the market has another leg down. But, really, it’s hard not to be impressed with the action, bolstered by a rapid, reliable growth story and solid action from some peers (like CIEN). Hold on if you own some, and if you don’t, we’re fine buying a little here or on dips of a few points. BUY A HALF
Ambarella (AMBA) was walloped during the past couple of weeks, which prompted us to go to Hold, but it held above its prior low and has now bounced above its 50-day line—the action has been tedious, but chart-wise, the stock is still among the more resilient names in the market. The firm has a Capital Markets Day on January 4 that could move the stock; we’ll be looking for any mid-range forecast (next year or two) that could bring more big investors into the fold. Right here, the bounce is encouraging, but we’ll stay on Hold. HOLD
Devon Energy (DVN) cracked near-term support Monday morning, but the action since then makes that move look like a shakeout, as the stock has snapped back nicely (and is one of the few of its peers back above its 50-day line). We’ll see how it goes, but week by week, the evidence suggests that big investors are buying and building positions in DVN and others, figuring that even if energy prices come down 10% to 20%, there will still be plenty of dividends and share buybacks to go around. A retreat back toward Monday’s lows could have us taking partial profits, but at this point, we’ll stay on Buy, thinking this week’s dip could have cleared out many weak hands. BUY
Floor & Décor (FND) dipped as low as 117 on Monday morning, nearly tagging its 40-week line (at 116.5) before rebounding nicely—like DVN, we’re hopeful that may prove to be at least a near-term shakeout that clears the decks for a “real” rally; we still believe the next major move will be up. As always, we’ll see how it goes. We had been using a 120-ish mental stop, though with the 40-week line approaching, we may lower that by a point or two to better align with the chart. Either way, if you own some and have sat through the tediousness so far, we advise hanging on. HOLD
ProShares Ultra S&P 500 Fund (SSO) was initially purchased nearly a year and a half ago, and while it’s not something you go around bragging about, it’s been a great performer for us. At some point, there will be a bear market, and we’ll sell the rest of our shares, but SSO’s recent action is solid, with a higher low (132 this week vs. 130 in early December) and the immediate pop back above its 50-day line. The negative Cabot Tides are obviously a yellow flag, but with SSO’s chart intact, we’ll stay on Buy. BUY
Watch List
Alnylam Pharmaceuticals (ALNY): It’s getting hit a bit today on some drug results, but overall ALNY remains in its broad base-building phase. We like the long-term sales growth forecast (>40% annually through 2025), and we’re thinking that, at some point next year, biotech/medical names will grab the growth leadership baton.
Datadog (DDOG): Similar to ZS (below), it’s resisting the growth stock debacle very well, with huge-volume support last week and with shares 11% off all-time highs. The application performance management space is mushrooming and DDOG has the numbers and chart strength that should lead to good things.
Nucor (NUE): We’re sort of lumping NUE in with TOL (below) as two cyclical stocks whose business strength is proving to be far more durable than expected—earnings are expected to come in north of $17 per share (!) next year.
Toll Brothers (TOL): TOL got yanked down but found support near its 10-week line. It’s not going to be your fastest horse, but the six-month rest period this year should lead to good things down the road, especially as earnings soar.
Trade Desk (TTD): Trade Desk gave back most of its big November earnings move, but the recent decline wasn’t abnormal (held the 50-day line) and volume was light.
Snowflake (SNOW): SNOW continues to act like a future leader, getting hit for a couple of days but then quickly bouncing right back. It’s still hanging around its 50-day line, which is great in this environment.
Zscaler (ZS): Cybersecurity names aren’t where the action is, obviously, but ZS intrigues us—it’s “only” 15% off its high and near the 50-day line, has shown two massive-volume support weeks and the story is as good as it gets, as big clients race to the firm’s next-generation security offering.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, December 30. As always, we’ll send a Special Bulletin should we have any changes before then.
| Stock | No. of Shares | Price Bought | Date Bought | Price on 12/22/21 | Profit | Rating |
| Ambarella (AMBA) | 1182 | 186 | 10/14/21 | 197 | 6% | Hold |
| Arista Networks (ANET) | 850 | 130 | 12/10/21 | 138 | 6% | Buy a Half |
| Cloudflare (NET) | - | - | - | - | - | Sold |
| Devon Energy (DVN) | 7,240 | 28 | 5/7/21 | 42 | 50% | Buy |
| Floor & Décor (FND) | 1,845 | 111 | 4/9/21 | 127 | 15% | Hold |
| ProShares Ultra S&P 500 (SSO) | 871 | 60 | 5/29/20 | 141 | 135% | Buy |
| CASH | 1,171,705 |