July 17, 2024

Housekeeping: We’re sending this update out a day early given the market’s action today — we’ll be a bit out of pocket tomorrow but will have any updates as need be

WHAT TO DO NOW: Today is a horrid day for most growth and AI-related stocks, continuing the rotation that began last week. All in all, there remain lots of crosscurrents, with our market timing indicators now positive, but individual growth stocks remain very hit or miss, all while earnings season is starting to rev up. Thus, we continue to favor holding a chunk of cash on the sideline while taking things on a stock-by-stock basis. In the Model Portfolio, we did some buying earlier this week, adding half-sized stakes in the ProShares Russell 2000 Fund (UWM) and Robinhood (HOOD), though tonight we’re going to sell our remaining small position in Uber (UBER) while placing Pure Storage (PSTG) on Hold as it takes on water with most peers. Our cash position is around 36%, which we’ll hold onto tonight as we watch to see how the rotation progresses from here.

Current Market Environment

Growth stocks are having one of their worst days of the past couple of years as money rushes out of many leaders. As of 1 pm EST, the S&P 500 is off 1.3%, the Nasdaq is down 2.8% and many growth stocks are off 4% to 7%.

We wrote a few times that a widening market divergence like we saw since Memorial Day increases the risk of a dramatic change in character—and that’s what we’ve been seeing in recent days, as the broad market has come alive as perception cements around the view the Fed will begin its long-awaited easing campaign relatively soon (most likely September). The buying surge pushed our Cabot Tides back to positive earlier this week and, as of today, our Two-Second Indicator has also joined the party, with five straight days of not just sub-40 readings, but single-digit readings.

Moreover, while we’re not huge fans of short-term breadth measurements (less reliable), the breadth we’ve seen during the past five or six sessions has been very rare and very strong—historically portending more solid gains ahead for the entire market. (We’ll likely write more about this in next week’s issue, especially if the breadth thrust persists.)

On the flip side, growth stocks remain hit or miss at best—and today is an awful day for the tech/AI names that had been strong. All told, for every stock or two that looks good there are one or two that are hitting resistance, and some are starting to crack.

Thus, it’s still an unusual situation: All three of our market timing indicators are bullish, and the recent breadth action portends good things—but growth stocks are having trouble getting any traction with more than a few hitting air pockets. Said another way, there remain tons of crosscurrents, so we’d be holding a chunk of cash on the sideline.

Earnings season will probably tell the tale—we’re optimistic some fresh leadership can show some power, but we’ll have to see how it goes.

Earlier this week, we added two new half-sized positions, one in ProShares Ultra Russell 2000 Fund (UWM) to give us exposure to a possible broad market liftoff, and one in Robinhood (HOOD), the glamour Bull Market stock. Tonight, though, we’re going to sell the rest of our stake in UBER and will place Pure Storage (PSTG) on Hold as it’s coming under pressure with its peers. Our cash position will be around 36% and represents both some portfolio cushion and also potential buying power if some fresh leaders emerge during earnings season.

Model Portfolio

AppLovin (APP) has been rejected by resistance a couple more times this month, and today it’s getting hammered, albeit on average volume. While backing away from resistance isn’t itself a red flag, it does increase the odds of a top forming—repeated distribution at a given level—so the drop of the past couple of days is something we’re watching closely. That said, so far, the stock is “only” back into the middle of its recent range, and we’ve already sold a third of our stake (a few weeks ago), so we’re not panicking here, but our antennae are up. HOLD

Cava (CAVA) is getting slapped around today, slicing through its 50-day line on average volume. That’s certainly not good, but also not a total surprise—having sold a third of our stake when the stock initially cracked, we’re willing to give what we have left a bit more room to consolidate given the unique long-term growth story here. If you’ve been following along, continue to hold your remaining shares, though we’ll be on the horn with any changes. Earnings are likely due in mid-August. HOLD

CrowdStrike (CRWD) continues to pull in, egged on by the rotation out of tech stocks; it’s dipping below its 50-day line (now near 358) along with many other stocks. Big picture, the fact that the stock is eating into its June upmove—caused by the S&P 500 addition—is not unusual and is the reason we’ve stayed at Hold in recent weeks. If CRWD (and tech stocks) can find support soon and bounce, we think it could provide a lower-risk entry point, actually … but as with most names in this whippy environment, we’ll have to see what comes. For now, we advise simply sitting tight. HOLD

On Holding (ONON) (and most retail names) had a tough retreat from around 44 to 36, retesting the top of its prior base, though it has found two days of above-average-volume buying support this week, with today certainly looking promising as well. Overall, we still think ONON checks most of the boxes of a winner: Strong sales and earnings growth, big projections both near and longer term as the firm expands its offerings within footwear and apparel, as well as a stock that is early stage (just broke out in May) and showed a lot of upside power. Of course, we own the stock and not the company, and a dip back into the 35 area (give or take a few dimes) would be iffy, but we’re optimistic the stock can resume its advance (and might be doing that here). HOLD

ProShares Ultra Russell 2000 Fund (UWM) moves about 2x the daily percentage of the Russell 2000, and we added a half-sized stake to get a hold of what could be a fresh upturn in the broad market—as of last week, the Russell had made no net progress since January 2021, three and a half years ago, and the upside breadth in the past week has been very rare, usually portending good things ahead. Now, to be fair, the flip side of this is that the upmove has been only a week long—and we’ve seen numerous rug-pulls in recent years—so we can’t say it’s a sure thing small caps have kicked into gear. But we look at it from a risk/reward perspective: If this move fails, we would take a reasonable loss, but if it works, the upside is many times greater. We started with a half-sized stake (5% of the portfolio) on Monday and will look to average up if UWM handles itself well from here. BUY A HALF

Pure Storage (PSTG) has the story, numbers and chart to be a winner, especially as its recurring revenue model ramps up and some AI/hyperscaler deals are put into place (which is looking likely in the months ahead, if it hasn’t happened already)—but there are bigger forces at work today, with the rotation out of tech hitting most any chip, networking or storage play out there. For the second time this month, the stock has dipped to its 50-day line, which is acceptable overall—but we’re going to play it safe, moving PSTG to Hold at this point and looking for it to find support, ideally above the 59-60 area that’s brought in buyers a couple of other times since early June. HOLD

Robinhood (HOOD) was our other new addition earlier this week—we’ve been watching it for months, but after a few weeks of tightening action and no net progress, shares perked up, so we stepped in with a half-sized stake. Obviously, if the market keels over for whatever reason, all bets are off for HOOD and many other Bull Market stocks—but right now, the “group” is acting great (KKR, BX, EVR, etc.), and we think Robinhood can grow in a big way from here if big-picture sentiment continues to swing higher. Earnings are out August 7. BUY A HALF

TransMedics (TMDX) hit a pothole last week along with many growth names, but after tagging its 50-day line for the first time since its big breakout in May—and we’re obviously pleased to see the stock bounce right back after that test—it’s challenging new highs today. Like everything else out there, the Q2 report (no set date yet, but likely out in early August) will probably tell the tale—we’re optimistic the big beats (on both the top and bottom lines; analysts now see profits from here on out) are possible, but as always, we’ll just take it as it comes. Right here, with the stock acting well, we’ll stay on Buy. BUY

Uber (UBER) has been a bucking bronco in recent days, getting tossed around by news (Tesla’s delay of the Robotaxi unveiling, then a loss in U.K. court concerning driver pay) and the market. However, while gyrating sideways isn’t the worst, we’ve decided to sell the rest of our position today for a couple of reasons. First, of course, the stock has been lagging for a while, topping out in February. Second, more recently, the stock has repeatedly been rejected at resistance in the 73 to 75 area, with yesterday’s mini-breakout failing in a big way today. And third, this is all happening while the broad market kicks into gear—many out-of-favor names (like UBER) have found a bid, but obviously, this one hasn’t been able to. Might UBER find support and get going on earnings? It’s possible, and we’re not ruling out getting back in if we see a new, sustained uptrend forming. But at this point, our patience has run out, especially as we’re looking to move money into fresh winners if and as they emerge. We’ll take the rest of our profit off the table and hold the cash. SELL

Watch List

Arista Networks (ANET): ANET has pulled back some with tech stocks during the recent rotation, but it hasn’t broken down. Earnings should be out around July 30.

Credo Tech (CRDO): CRDO is a fresh tech name (broke out late May) that could be near the heart of the AI boom—which is one reason the stock is still intact. A little rest period would be tempting. Earnings aren’t due until late August.

Guardant Health (GH): Guardant Health was an awful performer in recent years despite some solid growth (and expected growth) from its various blood cancer tests. And now there’s excitement surrounding its blood test for colorectal cancer, which should be a huge improvement vs. stool-based tests today (like Cologuard) with similar accuracy. Approval looks likely in the months ahead, and the stock has turned very strong ahead of that.

Halozyme (HALO): HALO hasn’t really outperformed the market since its big June patent-related gap higher, but it acts fine, nosing to new recovery highs of late. Earnings are likely out in early August.

Neurocrine Biosciences (NBIX): NBIX has been stuck in a tight 12% range for months, but like many biotech stocks, it’s starting to come alive, with a new drug likely getting approval before year-end. Earnings are out August 1.

Palantir (PLTR): PLTR digested a downgrade yesterday in fine fashion, holding above its prior highs. How the tech stock rotation plays out will affect PLTR, but the stock hasn’t been flying high, which likely means there is less pent-up selling pressure here. The story is enticing, though earnings, due August 5, will be key.

That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, July 25. As always, we’ll send a Special Bulletin should we have any changes before then.

Model Portfolio

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