What To Do Now: Remain defensive. The market in general and growth stocks in particular are certainly “oversold” enough to bounce, but so far, every rebound of a few hours or couple of days leads to more selling. We’re still holding lots of cash, and while we are sitting our four remaining positions, but two are on tight leashes. Our only changes tonight are putting Arista Networks (ANET) and ProShares Ultra S&P 500 Fund (SSO) on Hold, but we’ll be on the horn if we have any other changes. Our cash position stands near 60%.
Current Market Environment
Stocks started off on a positive note today, but once again sold off sharply into the close. At day’s end, the Dow was down another 313 points, and the Nasdaq was off 186 points.
Frankly, there’s not much new to say when it comes to the market—the sellers remain in control, with most of the damage concentrated in growth titles, many of which continue to unravel. Coming into today, the Nasdaq was already down more than 8% for the year, but even that has been better than growth-oriented indexes like the Next-Gen Nasdaq 100 (QQQJ, down nearly 11%), the Russell 2000 Growth Index (IWO, down more than 12%) and the IBD 50 Fund (FFTY, down nearly 14%).
As for our indicators, the long-term Cabot Trend Lines are still bullish, but for the first time since their last (buy) signal in June 2020, they bear watching—the Nasdaq is below its 35-week line while the S&P 500 is closing in. We do need two weeks of both indexes closing below their respective trend lines for a sell signal, so it’s not something that will flash this week, but again, we’re watching closely.
As for the Cabot Tides, they’ve again flipped to negative, though to be fair, we’re keying less of this measure right now—there’s no question the market is highly divergent, so we’re taking more of our cues from individual stocks, as well as the aforementioned growth-oriented indexes (whose intermediate-term trend has been pointed lower for a few weeks).
With all that said, there are some positives out there. First off, we’re still seeing plenty of decent action among cyclical areas—not super-strong, of course, but a good number of setups. The trick, of course, is that the selling is showing signs of spreading (the potential long-term breakouts for many cyclical sectors has been thwarted, for now anyway).
Another potential positive is in the “it’s so bad, it could be good” area—we’re not big believers in oversold stuff, but you don’t need a magic indicator to see that most growth stocks have already been cut in half, that hundreds of stocks are hitting new lows nearly every day and that the dichotomy between growth and the rest of the market is super extreme.
All in all, then, our stance is mostly unchanged: First and foremost, it’s best to remain cautious and patient—there’s no real money being made here, so it doesn’t make sense to play heavily to any degree … but there will be big money made when this is all over, so the goal is to get to that time with your portfolio in one piece.
Second, though, we’re still not in a mood to sell wholesale—we’re gritting our teeth with a couple of positions, but with nearly 60% in cash (we’ve had at least 43% in cash since very early December), we’re content to sit tight for now and see how things go from here. We have no changes tonight.
Model Portfolio
If this was a normal, uptrending market, Arista Networks (ANET) would look pretty iffy, as it sits below its 200-day line and has slid fairly sharply during the past couple of weeks. But in this growth stock environment, ANET still acts pretty well—it’s holding miles above its 200-day line (79% of Nasdaq stocks are below their 200-day lines!) and is “only” 17% off its high. We still think the combination of its rapid, reliable growth story and the fact that the stock just changed character in November (should be early stage) means ANET is in pole position to be a leader during the next uptrend—however, our leash isn’t limitless, either, and the stock is getting caught up in the maelstrom. Right here, we’re hanging on as there’s support in this area and selling volume has actually been tame. But much more weakness could force us to pull the plug. We’ll switch to Hold and see how it goes. HOLD
Devon Energy (DVN) has hit some resistance near 50 in recent days, so if you’re looking for something to worry about, that would be it. But, while we can’t rule out some short-term weakness (in both oil stocks and oil prices), we remain quite optimistic going ahead—the thrust that the sector has shown since 2022 began has historically led to good things in the intermediate term, and even a 20%-ish decline in oil prices would still have a stock like DVN likely trading at just eight times free cash flow and a dividend yield close to 7% at worst. Again, near term, another wobble or two is possible, but until proven otherwise, pullbacks should be buyable. BUY
Floor & Décor (FND) has gotten away from us—really, the only “good” move during the past six weeks in growth land has been selling, so anything that’s been held is likely lower than it was a few weeks back. We’re not going to trumpet sunshine here, as FND’s chart is weak, though there is a good amount of support in the 100 area. Right here, given our big cash position and the oversold nature of many indicators, we’ll stick with FND, but it’s likely we’ll be letting it go sometime soon—ideally on a bounce with the market back into resistance. Hold for now. HOLD
ProShares Ultra S&P 500 Fund (SSO) has gotten hit of late with everything else, but it isn’t so much weak as it is all over the place, with the fund gyrating between 65 and 74 since early November. Long term, we still see more positive evidence for the market than otherwise, but it’s getting close—there are more than a few yellow flags out there. There is support in this area (the S&P 500 is still above its early-December lows) and we’re OK giving SSO some rope from here, but given the action and the Tides red light, we believe it prudent to switch to a Hold rating. HOLD
Watch List
Freeport McMoRan (FCX): We’re not going to have a portfolio full of commodity stocks, but FCX is on the verge of breaking out of a big base despite the market’s issues—and the long-term potential for higher copper prices is big given the role it plays in alternative energy systems.
Marathon Oil (MRO): As we wrote last week, it might be simpler/easier/better to just average up on DVN, but MRO is a mid-cap name in the energy space we think has great potential—and the stock is one of the stronger ones in the sector.
Planet Fitness (PLNT): 2022 should be a major comeback year for business, and while the stock’s recent breakout hit a wall because of the market, it’s still near the top of a giant launching pad.
Snowflake (SNOW): SNOW is still holding its 200-day line, which is actually unusual in this environment for growth stocks. It has work to do, but we have conviction that the stock will be a fresh leader at some point down the road.
Zscaler (ZS): We prefer to go with fresher names in the next market uptrend, which works against ZS. But the stock has held its 200-day line so far, and there’s no doubt sales and earnings will grow many-fold from here as the firm’s zero trust security platform is adopted en masse.
That’s it for now. You’ll receive your next issue of Cabot Growth Investor next Thursday, January 27. 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 1/20/22 | Profit | Rating |
| Arista Networks (ANET) | 1626 | 137 | 12/10/21 | 122 | -11% | Hold |
| Devon Energy (DVN) | 7,240 | 28 | 5/7/21 | 49 | 73% | Buy |
| Floor & Décor (FND) | 1,845 | 111 | 4/9/21 | 100 | -10% | Hold |
| ProShares Ultra S&P 500 (SSO) | 1,741 | 30 | 5/29/20 | 65 | 116% | Hold |
| CASH | 1,243,998 |