WHAT TO DO NOW: Remain cautious. Today’s rally was a breath of fresh air, but nothing has really changed with the evidence: There remain many secondary positives, but all of our key trend-following measures are negative, and very few stocks in general (especially growth stocks) are in good shape. Thus, we’re open to the possibility that the bulls could show up, but we need to see it to believe it. In the Model Portfolio, we’re now 64% in cash after another partial sale of Devon Energy (DVN) earlier this week; our only change tonight is moving Palo Alto Networks (PANW) to Hold.
Current Market Environment
The market is finally enjoying a rally today, with the major indexes up after a few positive earnings reports. As of 2:45 ET, the Dow was up 644 points and the Nasdaq was rallying 400 points.
Today’s rally was nice to see, but nothing much has changed with the overall picture. When looking at secondary-type measures, there are still a few rays of light, especially when it comes to breadth—as the indexes have all retested their January-March nadirs this week, we’ve seen far fewer stocks hitting new lows on both the NYSE (591 yesterday vs. 724 in March and 792 in January and February) and Nasdaq (862 yesterday vs. 921 in March, 1,344 in February and 1,755 in January). Sentiment is also still in the doldrums—our Real Money Index is now at its lowest level since late 2020/early 2021, while some surveys show deep pessimism.
When you combine that with the fact the major indexes have been retesting their lows from six weeks ago (successful retests often happen four to eight weeks after the initial bottom), we remain open to the possibility that the market could be etching a meaningful low.
However, those rays of light have failed to spark anything much to this point—today’s rally obviously looked solid, but all of our trend-following measures (Cabot Tides, Growth Tides, Cabot Trend Lines) are still solidly negative, and growth stocks remain in rough shape; running through a list of former leaders, it’s hard to count the number that are down 50%, 60% or more. (Go look at TDOC and ALGN today.) Moreover, defensive areas are still in favor and the vast majority of stocks are still buried (two-thirds of NYSE stocks and 85% of Nasdaq names are south of their 200-day lines!).
Put it all together and the story remains mostly the same: We’re trying to give our small remaining holdings rope because of the secondary positives and because they (and the major indexes) have dipped right to support, but we’re also holding more cash than stocks and need to see some persistent strength among growth stocks to start putting money to work.
In the Model Portfolio, we pruned one-third of our remaining stake in Devon Energy (DVN) on a special bulletin earlier this week, leaving us with around 64% in cash. Our only change tonight is placing Palo Alto Networks (PANW) on Hold.
Model Portfolio
Arista Networks (ANET) fell right down to its 200-day line on Tuesday and Wednesday, which also lines up with its January-March lows, before finally catching a bid today. Like most names, the action isn’t pretty, but having held through the downs and ups of recent months and with so much cash on the sideline, we want to give shares every chance possible to hold up. Arista will report earnings next Tuesday (May 2), which will be key, though investors were encouraged by Meta’s (FB) conference call last night, where capital expenditures for Q1 (and guidance for the whole year) came in on track, a sign that demand for Arista’s gear is probably as strong as ever. If you’re craving more cash in your portfolio, trimming some ANET ahead of earnings is an option, but we’re going to hold for now, keep shares on a tight leash and see what comes. HOLD
Devon Energy (DVN) took a wallop with most of the rest of its peers earlier in the week, and we decided to trim our position a bit more (selling one-third of our remaining shares) as the odds favor some sort of consolidation at this point. Of course, “odds favor” doesn’t mean 100% chance—Devon reports earnings next Tuesday (May 2), and it’s possible that a big dividend and/or other shareholder return announcements could reignite the uptrend. We’d be all for it as we still have a decent-sized position, but the big run, sharp selling in all commodity stocks and sour overall environment have us thinking it’s better to be safe than sorry. We’re willing to give what we still have rope, but we’ll remain on Hold here and see what the quarterly report brings. HOLD
Oftentimes when a deep downturn is unfolding, it won’t end until the sellers come around for everything, and that might be what’s going on with Palo Alto Networks (PANW), which was perched near new-high ground a few sessions ago before pulling right into its 50-day line. The action is enough for us to downgrade the stock to Hold, though we’re not pulling the plug yet—volume has been light on the decline and there should be good support in the 550 to 575 area. Plus, of course, all signs point to a long runway of growth here: One analyst sees the firm’s core network security offerings (on-premise firewalls, etc.) growing decently, but more important, providing tons of upsell opportunities for Palo Alto’s next-generation products, leading to a doubling in free cash flow from 2021 to 2024. Obviously, if the market’s implosion continues, all bets are off, but PANW is still one of the more resilient names out there. HOLD
ProShares Ultra S&P 500 Fund (SSO) has gone from “not great, but holding OK” to a full-blown retest of its 2022 lows, following the S&P 500. Nobody is going to say the chart looks good, but we’re also not giving up—the index and fund are obviously at key support, and with many secondary positives out there, we’re going to give SSO a chance; in fact, given that we’ve had the fund rated Buy the entire time, we’ll stay there for now. But like most things, just realize we could change our view quickly—if the next bounce (ideally one started today) falters quickly, we’ll almost certainly at least trim our position. That said, we still think a solid-looking rally following this super-tedious retest phase could turn into something meaningful. Continue to hold on if you own some, and if not, you can consider nibbling here (assuming you already have a ton of cash) with a tight stop. BUY
Pure Storage (PSTG) certainly doesn’t look great, but since its selloff two weeks ago, shares have done more chopping than declining (it’s actually unchanged over the past two weeks as the market has tanked). Fundamentally, we think demand for its storage offerings—and more importantly, its storage-as-a-service subscription product, along with add-on services like data migration, spend management and more—should remain strong for years to come. As with our other names, with PSTG near support, we’ll hold our half-sized stake here but keep it on a tight leash. HOLD
Watch List
AirBnb (ABNB): Admittedly, ABNB needs work and has earnings next week, so who knows if it will turn into another high-profile dude. But big picture, we see a massive post-IPO base, something that’s launched a ton of new leaders in the past. It doesn’t hurt that travel stocks are perking up as demand goes bananas following two years of cabin fever.
Halliburton (HAL): HAL’s sharp break from new highs to just below the 50-day line likely marks the start of a rest phase—though we don’t think the overall run is over. It needs some time but we still think HAL is worth watching.
Halozyme (HALO): HALO remains in good shape, with a pullback this week still leaving the stock above its 25-day line. Frankly, a couple weeks of calm trading here would be a good thing and set up a potentially strong entry point—if the market can get moving.
Lantheus (LNTH): LNTH has mostly been cool as a cucumber, pulling back a few points on light volume only to its 25-day line. Earnings are due out tomorrow.
Nutrien (NTR): NTR is a similar story to HAL and most other commodity names—short-term, the drop from its high will probably lead to some reverberations, but we’re not willing to say the overall move is over. In fact, we think this could be the shakeout that refreshes the advance.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, May 4. 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 4/28/22 | Profit | Rating |
| Arista Networks (ANET) | 1,626 | 137 | 12/10/21 | 121 | -11% | Hold |
| Devon Energy (DVN) | 2,413 | 28 | 6/4/21 | 60 | 113% | Hold |
| Palo Alto Networks (PANW) | 176 | 620 | 3/30/22 | 594 | -4% | Hold |
| ProShares Ultra S&P 500 (SSO) | 3,410 | 47 | 5/29/20 | 59 | 24% | Buy |
| Pure Storage (PSTG) | 3,043 | 36 | 3/25/22 | 31 | -14% | Hold |
| CASH | $1,320,839 |