WHAT TO DO NOW: Growth stocks have started out the year with another vicious leg down, with most names in a variety of sectors down 10%-plus in just three days. In the Model Portfolio, we have a good amount of cash, but we also have a couple of problem children. Today, we’re going to sell half of our stake in Ambarella (AMBA), place Datadog (DDOG) on Hold and keep both on tight leashes in the days ahead. Our cash position will now be just south of 50%.
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Growth stocks are continuing on their path lower so far today while some cyclical stocks perk up—as of 12:15 EST, the Dow is up 115 points but the Nasdaq is down 155 points and most growth stocks are off much more than that.
We’ve been around for a long time, but we can’t remember a start to the year quite like this one: Growth stocks have melted down, with most names falling 10% to 15% in just three days, and of course this comes after some sour performance in November and December, too.
Moreover, while some areas (like software) have suffered more than others, it’s not just an industry or two—software, medical, biotech, cybersecurity, fintech, retail, solar, “growth” commodities (like lithium), just about everything growth except for networking is getting smashed.
Meanwhile, our Cabot Tides remain in good shape, with the market’s overall trend pointed up, driven by defensive areas (XLP, XLU still look solid) and cyclicals (many financials and commodities are breaking out)!
To say it’s an unusual situation is a huge understatement—most growth stocks are broken, yet the risk of rotation is real as well, especially as early January is known for lots of sharp movements, repositioning and reversals.
Obviously, looking at the big picture, you should remain cautious, if not defensive—holding plenty of cash is a must. We’re not strictly opposed to playing the cyclical areas (Nucor (NUE), Toll Brothers (TOL) or even Diamondback Energy (FANG) look promising), but we’d rather wait there and see how things play out.
More important are the stocks in the Model Portfolio, where we have a couple of problem children. Right now, four of our names still look fine—ProShares Ultra S&P 500 Fund (SSO) and Devon Energy (DVN) remain on Buy and are at/near new highs, though as always, dips are best if you want in. Floor & Décor (FND) and Arista Networks (ANET) have taken on water but are still in overall fine shape.
The two that are giving us issues are Ambarella (AMBA) and Datadog (DDOG).
For AMBA, we wrote last week that the firm had an Investor Day on Tuesday, and the news seemed solid, with some new technology announced and implied guidance that called for a doubling of its computer vision chip revenue in 2022. However, after nearly notching new closing highs on Monday, shares have collapsed (especially today) back below their 50-day line on big volume. The action is obviously negative, and the last few weeks now look toppy, so we don’t want to ignore the weakness—that said, the stock is still above support in the low 170s that it tested and held in both November and December. Thus, today, we’re going to split the difference—we’ll sell half of our overall position and hold the rest with a tight leash. SELL HALF, HOLD THE REST
As for our most recent recommendation, Datadog (DDOG) has gone from one of the most resilient growth stocks in the market to being caught up in the software/growth stock debacle this week, sliding down to support near 150 as we write this. The action is obviously a huge disappointment, but the goal is to make sure a bad situation doesn’t get much worse—with DDOG right in our stop area, we’ll hold for the moment, but any further weakness will likely have us selling. HOLD
The partial sale of AMBA will leave us with nearly 50% in cash. Don’t hesitate to email me mike@cabotwealth.com with any questions.