April 28, 2019

To review, we took advantage of being early movers when the new bull market began to offer first-stage pattern setups in early January among aggressive growth stocks. Breakouts in these names allowed us to capture gains into February and early March.

Since mid-March, the quantity and quality of setups left a little something to be desired. These reports and the videos noted this in real-time and counselled patience. It was a matter of the original leaders moving up 20%-25% or more -- so that they were extended -- and then needing time to reset themselves by forming second-stage bases, most of them of the flat variety.  This is normal for a bull market.

While Johnny-come-latelies also broke out of bases in recent weeks, for the most part they did not present the power or gains of the original set of leaders which broke out in January and February. This is exactly what I have found to be the case for years: It is preferable to buy the original leaders when they come out of second-stage bases rather than Johnny-come-latelies as they emerge from first-stage bases.

Our patience in waiting until some of the original leaders began to form second-stage bases may be starting to pay off: There are currently more pattern setups in the growth sector than any time since January. The Focus List has 21 names.

Despite the improved technical climate for growth titles, which began subtly last Monday, Apr. 22, two negatives are apparent. Volume has been sub-par, both among the averages and also the leaders. To an extent, this may be due to hesitation ahead of an earnings release. Volume is always preferred on a breakout, as it indicates large-money interest, which often needs to build positions by chasing stocks post-breakout. This is what leads to follow-through post-breakout.

Second, and this is a subtle point that is likely missed by most, RS lines of numerous leading stocks are lagging price into new-high ground. This was the diametric opposite of what occurred with the growth sector back in January and February. While this is not a deal breaker, it lurks as a negative. It shows that growth is not leading like it was in Q1. At the same time, there are some issues showing an RS line that moves into new-high ground coincident with price.

Among the names, Chegg (CHGG) is expected to record 24% earnings growth in ‘19/’20. Sales rose 19% and 30% in the two recent quarters. A 96 RS stock with a 71 RS group rank and B- acc/dist rating.

Price forms a constructive five-week flat base with a 13% depth. It can be taken above the pattern high of 41.69. Earnings expected Apr. 29 (confirmed).

Etsy (ETSY) should record earnings growth of 11%/53% for ‘19/’20. The handmade goods retailer has grown revenue at 41% and 47% in the two recent quarters. A 98 RS stock with a B- acc/dist rating.

Price forms an eight-week flat base with a 15% depth. It can be taken above the 73.34 pattern high. Notice how price has settled down during this base compared with the sloppier behavior late last year. Earnings expected May 8 (confirmed).

Evolus (EOLS) shows losses for ‘19/’20, per Wall Street analysts. This is a development company and hence does not have any revenue. A 99 RS stock with a B acc/dist rating.

Of note is the triple in seven weeks during Q1. Since then, price has formed a 10-week consolidation with a 37% depth. This depth is considered reasonable given the major move it was digesting. The stock can be taken above the pattern high of 30.25. Given the development-stage phase of this outfit, it is considered a higher-risk vehicle. Earnings expected Apr. 30 (confirmed).

Fluidigm (FLDM) is a higher-risk vehicle. Losses at the medical systems maker have been booked for the past seven years and more are expected this year and next. It is a small-cap company with just $10.3MM in ADDV. It is priced in the mid-teens, which represents higher risk than stocks priced at 20 and up. Sales increased by 17% in the two most recent quarters.

Where the stock redeems itself is its 99 RS rank and its A- acc/dist rating. As well, it vaulted as much as 83% in under six weeks during Feb/Mar. For those players who don’t mind the higher risk, price sets up in an attractive five-week flat base with 16% depth. The pivot is 14.90. Earnings expected May 2 (confirmed).

Hubspot (HUBS) shows earnings growth estimates of 28%/44% for ‘19/’20. Revenue growth is rock-steady at 35% in each of the two recent quarters. A 95 RS stock in a 96 RS group with a B acc/dist rating.

Price sets up in a 10-week flat base that formed directly on top of the prior four-month base. The current base has a constructive 12% depth. The stock can be taken above the 180.00 pattern high. Earnings expected May 7 (confirmed).

Innovative Industrial Properties (IIPR) is forecast by the Street to log earnings growth of 108%/41% in the ‘19/’20 years. Revenue has grown at a triple-digit rate over the past five quarters. A 99 RS stock with a B- acc/dist rating.

The stock forms a five-week consolidation with a 19% depth. This is slightly excessive for a five-week pattern, but price has a ways to go before clearing the pattern high. IIPR can be taken above the 93.24 pattern high. Earnings expected June 12 (unconfirmed).

Mimecast (MIME) shows earnings per share of -0.01/0.27E/0.50E for the March ‘18/’19E/’20E fiscal years, making ‘20 estimated growth equal to 85%. Revenue growth has been 30% in the last two quarters. A 96 RS stock in a 97 RS group with a B acc/dist rating.

Price forms a 10-week consolidation with a 16% depth. It can be taken above the 51.66 pattern high. Earnings expected May 13 (confirmed).

Q2 Holdings (QTWO) should post earnings growth of -38%/220% for ‘19/’20. Sales grew 21% and 30% in the two most recent quarters. A 95 RS stock in a 94 RS group with a B+ acc/dist rating.

Tuesday, the stock broke out of a 10% deep, seven-week flat base on +119% volume. The name had been noted in the Focus List for at least two days prior to this. QTWO sits 3.5% past its 72.00 pivot. It is thus not yet 5% extended and can be taken around Friday’s close of 74.52. Earnings expected May 7 (confirmed).

In sum, our patience in recent weeks is on the cusp of being rewarded, as a number of the original leaders are now four and five weeks into second-stage bases. Subscribers should carefully review the Focus List and plot their course of action.

Kevin Marder

For intraday ideas and analysis: https://twitter.com/mardermarket

Unless otherwise noted, charts created using TradeStation. ©TradeStation Technologies, 2001-2019. All rights reserved.

The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held no positions, though positions are subject to change at any time and without notice. Estimate data provided by Thomson Reuters. Expected earnings release dates provided by EarningsWhispers.