WHAT TO DO NOW: With our Cabot Tides negative, we’ve moved to a half-in, half-out stance—we’ve sold three stocks during the past week (one before Brexit, two after), which leaves us with five stocks and a cash position near 50%. The powerful bounce of the past two days is very encouraging, but the odds favor some backing and filling at the very least (if not further weakness) before a sustained uptrend gets underway. We have no changes in the Model Portfolio tonight.
Current Market Environment
The market rallied strongly for the second straight day, with the Dow advancing 285 points and the Nasdaq surging 87 points.
The post-Brexit decline was swift, with the S&P losing about 5.7% and the Nasdaq falling 6.8% in just two days. But the snapback since then has been very encouraging, recouping a big chunk of the Friday/Monday decline.
Our market timing indicators are mixed. Our Cabot Tides are negative, as all the major indexes are below their 50-day lines. A new buy signal is possible if the indexes rally another 1.5% to 2% from here, though if that happened, the market would then have to face the same overhead resistance (north of 2,100 on the S&P 500) that it’s been battling for 18 months.
On the bullish side of the ledger are our Cabot Trend Lines and Two-Second Indicator. Each took on some water (we saw two consecutive days of greater than 40 new lows, for instance), but not enough to flash sell signals.
Individual growth stocks are also mixed, with many holding up very well during the past week, but obviously more than a few have broken down.
Looking ahead, the odds favor the current bounce running into difficulty. If we had to put numbers on it, we’d say there’s a 20% to 25% chance that the Brexit selloff was the final shakeout to the market’s huge consolidation (since late 2014), paving the way for a straight-up move from here. But it’s far more likely that a period of backing and filling (if not another move lower) will come next as the indexes butt up against overhead resistance (and, possibly, as more Brexit reverberations hit the market).
Put it together and we think a half-in, half-out stance makes sense right now. Definitely hold your strong, profitable stocks, and give them a chance to hold support and eventually resume their upmoves. But we think having a good-sized cash position is prudent, too. As always, we’ll stay flexible and let you know if we have any changes in the days ahead.
Model Portfolio
Adobe Systems (ADBE 94) broke its 50-day line on earnings last week, and the decline worsened after Brexit, which prompted us to take our small loss (about 7%) on Friday’s special bulletin. The stock’s bounce during the past two days has been just OK, not great, so we think you can use this rebound as a chance to exit if you still own shares. Fundamentally, we think business is fine, but the chart and the market tell us more consolidation is likely. With a loss, it’s not worth holding. SOLD.
Facebook (FB 114) nosedived to its 200-day line on Monday, falling as low as 108, before snapping back during the past couple of days. For what it’s worth, about 10% of revenues come from the U.K., so the dive in the British currency could have a short-term negative impact. As we’ve been writing for a while, if you have a loss, you should keep the stock on a tight leash. (If you sold your shares, we don’t advise buying them back here.) But if you have a longer-term profit like us, we think it’s best to be more lenient—FB remains in a gradual uptrend, with higher highs and higher lows during the past many months, and the long-term growth plan remains firmly on track. HOLD.
Five Below (FIVE 46) has little to nothing to do with Brexit, so it’s encouraging to see the stock hold up in fine fashion during the past few days. Obviously, if the market tanks, every stock will be under the gun, but Brexit or not, we expect steady growth for many years as management expands its store base. We’ll stay on Buy, but you should keep new positions small and try to buy on dips of a point or two. BUY.
ProShares Ultra S&P 500 Fund (SSO 65) snapped back with the market over the past two days, and it currently sits in the middle of its range for the past three months. A drop all the way to 59 (below this week’s low) would tell us the market’s decline is picking up steam and would likely have us selling SSO. But right here, given our 50% cash position, we’re OK holding on and giving it a chance to hold up. HOLD.
Salesforce.com (CRM 79) crashed through its 50-day line on Friday and Monday on a big pickup in volume, prompting us to sell on Monday’s special bulletin. Like ADBE, the chart wasn’t a total disaster, but we had a loss, and any good growth investing methodology is about losing small and winning big. CRM’s bounce since then has been decent, but the stock is still below its 50-day line. We think there will be faster horses to own in the next uptrend. SOLD.
Ulta Beauty (ULTA 241) continues to act well, pulling back only to its 25-day line before bouncing today. There was some negative news yesterday—according to comScore, total unique visitors to the firm’s website grew only 26% in May from the prior year, a big deceleration from the 40% to 50% growth rates in recent months. It’s something worth watching, but we can hardly freak out about it when (a) it’s just one month of data and (b) e-commerce revenues are 5.6% of the company’s total. With the stock in a firm uptrend, we’ll stay on Buy, but keep new positions small. BUY.
Vulcan Materials (VMC 119) took a hit on Monday, which wasn’t hugely surprising—VMC is the most economically sensitive of our stocks, so any fears on that front bring out the sellers here. Even so, Vulcan has little to do with a slowdown in Europe, and thus far it’s held its 50-day line and is only a stone’s throw from new high ground. We moved VMC to Hold on Monday, and we’ll keep it there today, but we like the overall action and think the stock can do very well once the market gets going. HOLD.
Watch List
Abiomed (ABMD 108): ABMD actually leapt to multi-month highs today, a very bullish sign. Combined with its excellent growth and story (Impella heart pump), we see big potential in the next market advance.
Amazon (AMZN 716): AMZN is probably the most resilient of all the big-cap growth stocks in the market as investors look toward monstrous earnings growth in the years ahead.
Dave & Buster’s (PLAY 46): It’s still thinly traded, but we love the chart and the firm’s unique retail concept.
Ligand Pharmaceuticals (LGND 121): LGND is back on the Watch List because it’s surged back above its 50-day line, part of a good-looking two-month base. The story is great—now it’s a matter of whether the biotech sector can get going.
Nvidia (NVDA 47): Nvidia looks like it might need some time to rest after a huge February-June run and a big-volume dip on Brexit. Still, the overall picture looks fine, and a calm consolidation could present a great entry point.
Veeva Systems (VEEV 34): VEEV’s pullback looks normal to us. The stock’s big-volume lift in late May likely kicked off a major uptrend.
Zillow (Z 35): Z is just below new highs and its two-day Brexit pullback has quickly been recouped. This firm’s earnings should mushroom in coming quarters thanks to the mega-trend of real estate ads moving online.
That’s it for now. Your next issue of Cabot Growth Investor will be sent to you next Wednesday, and, as always, we’ll send a Special Bulletin should we have any changes before then.
| Stock | Date Bought | Price Bought | Current Price | Profit | Rating | |||
| Adobe (ADBE) | 5/26/16 | 100 | 94 | — | Sold | |||
| Facebook (FB) | 8/1/13 | 38 | 114 | 204% | Hold | |||
| Five Below (FIVE) | 4/7/16 | 40 | 46 | 14% | Buy | |||
| ProShares Ultra S&P 500 Fund (SSO) | 5/12/16 | 64 | 65 | 1% | Hold | |||
| Salesforce.com (CRM) | 5/26/16 | 84 | 79 | — | Sold | |||
| Ulta Beauty (ULTA) | 11/6/14 | 121 | 241 | 99% | Buy | |||
| Vulcan Materials (VMC) | 2/26/16 | 99 | 119 | 20% | Hold |