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Has a Real Growth Stock Correction Arrived?

After rising for months, a “real” growth stock correction is under way. How long will it last? And how to fortify your portfolio?

cash growth pots grass

We saw signs growth stocks were ready for a “real” correction in June, but the buyers showed up. And again in July, it appeared the red-hot growth titles were ready to rest—and some of them did—but most enjoyed yet another surge to record highs soon after. But now, after triple-digit gains in many stocks over the past four-plus months, we’ve finally seen a character change in the leaders, and it appears some kind of growth stock correction has arrived.

Instead of big (often overwhelming) buying volume on the way up, many moved to new highs tepidly two weeks ago. Instead of one- or two-day dips, we’re seeing a consistent stream of selling over many days with little ability to bounce (at least to this point). And instead of nearly all finding support near logical levels, we’ve seen a good number of leaders crack key support (50-day moving averages, etc.), which itself is a sign that big investors have changed.

Summed up, while everything pretty much went according to script from April through early August, we’re now seeing a lot of abnormal intermediate-term action. Thus, we’ve been paring back in our Cabot Growth Investor advisory, selling one stock outright and taking partial profits in three others; our Model Portfolio now holds 37% in cash.

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Not all news is dour, though. First off, notice we wrote that we’re seeing intermediate-term abnormal action—while a couple of stocks that have had extended runs could be done for, the vast majority we’re looking at (and own) still are likely early-ish in their overall upmoves and aren’t being splattered on the floor.

Moreover, this nascent growth stock correction has actually benefited many other areas—sector rotation has helped some of the broader indexes (small- and mid-cap stocks, etc.) perk up, keeping our trend-following indicators solidly bullish, while many secondary pieces of evidence (new lows, etc.) are also encouraging.

Thus, we’re not going to extrapolate the weakness in growth stocks (many of which ran higher while the broad market meandered in the spring) to the rest of the market; it’s always possible that happens, but no sign of it yet. Instead, this simply looks like a case where, after a big, prolonged run, leading growth stocks are beginning well-deserved corrections.

How exactly you want to handle the wobbles is up to you (i.e., how much profit you’re willing to give up), but as usual, we prefer a middle ground—we’re never much in favor of holding and hoping things turn around, but throwing most of your stocks overboard isn’t advised, either. Hence, we’ve been taking things on a stock-by-stock basis, paring back when needed while keeping our eyes open on fresh leadership that’s holding up well.

If you want to know which growth stocks I still list at “Buy” in my Cabot Growth Investor advisory, click here to learn their names. Despite the recent growth stock correction, our portfolio boasts an average return of 62% on our eight current stocks—all of which were recommended in the last year.

Editor’s Note: This post was excerpted from a recent issue of Cabot Growth Investor.

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A growth stock and market timing expert, Michael Cintolo is Chief Investment Strategist of Cabot Wealth Network and Chief Analyst of Cabot Growth Investor and Cabot Top Ten Trader. Since joining Cabot in 1999, Mike has uncovered exceptional growth stocks and helped to create new tools and rules for buying and selling stocks. Perhaps most notable was his development of the proprietary trend-following market timing system, Cabot Tides, which has helped Cabot place among the top handful of market-timing newsletters numerous times.