Stocks logged a notable session today, with computer software issues getting a boost from a glowing earnings reading from Salesforce.com (CRM). The Nasdaq is now moving away from its 9 ema to an extent that has in the past resulted in some minor softness within a few days.
Nine names were added to the Focus List for today's session, and five triggered entry. Notable gains were posted in Adobe (ADBE), Coupa Software (COUP), Nio (NIO), and Servicenow (NOW), among others. Nio, the Chinese EV maker, was added to the Focus List for Tuesday's session and is up 32% in two days. This company appears to have high potential given the giant addressable market globally for its products.
This week's action tabled any concern of distribution in some names that was noted in Sunday's report.
If you are like me, the most pressing problem these days is being fully invested and having to make a decision as to whether to exit an otherwise healthy position in order to buy something new. It is a good problem to have.
Please click on the following charts to zoom in.
Niu Technologies (NIU)
Veeva Systems (VEEV)
Vital Farms (VITL)
In sum, growth stocks have pranced all over the tape this week. Software issues, in particular, have performed well. Let's approach things with an open mind, as it is unclear how much longer the big moves in some of the younger, newer issues can continue. They can sometimes act as a canary in a coal mine. Could this be froth? To a certain extent, it appears that way, however a market like this should never be underestimated.
That was the takeaway of the 'Nineties bubble era.
Q: In your discussion about options, you did not talk about exit strategies. Is it exit at 40% stop loss or gain? Trailing stops? Are you using the technical charts for breakout or resistance? Thanks for the help.
A: Below are the exits from the video, which I assumed you watched. A trailing stop is not used. This is a quantitative strategy based on historical testing of how a particular stock option has performed over the past few years. The buy decision is based on statistics of won/loss % and profitability which was included in the DOCU example shown in the video.
A stock's price must be > 50 ma to be considered. That is the only technical requirement. Position sizing should be based on the premium paid to get into the trade, NOT the 40% stop loss, which could easily be blown through on a gap-down open in a stock.
Exits: 1) When 40% profit target is hit, 2) When 40% stop loss is hit, 3) If 1) and 2) are not hit, then one day in advance of earnings.
Q: Why do you want to buy companies that are up 1x to 3x from the March lows? I assume you would say...they are leaders and have performed well off the lows and will continue to lead higher. I wonder if their excellent performance (say 2x to 4x) to new pivot buy points may limit future performance? i assume you would not agree?
A: The ones that go up x% before others can go up x% are more likely to be the ones that go up another x%, in my experience. Bill O'Neil has traded for 58 years since putting together his strategy in '62. Yet the bulk of his money was made from just 12 names. This might imply that he buys and then adds on to issues that are the big burners of a market advance, the ones that have proven themselves to have what it takes.
Q: I just had a couple of clarification questions regarding the options video. As noted, I'm a beginner and I understand most of the basics with no desire to go into the weeds so I appreciate this strategy for the simplicity. When you say 40% profit or stop-loss, you're referring to the premium, correct? If it gets to that 40% profit or the day before earnings and we close the position, does closing the position mean selling the option or exercising the right to purchase the option and then selling the shares? I apologize if you mentioned that in the video and I didn't catch it. Thank you.
A: The 40% profit target and the 40% stop loss are based on the premium. We would always sell the option to close a trade. We would never exercise an option to buy the stock and then sell the stock. It is important to be out of the trade prior to earnings.
Q: I just got signed up for the service. Are you totally sector and industry agnostic? For instance will you select from the best industry groups depending on what the market is favoring in the current cycle? Or do you only select from particular growth related groups?
A: Welcome. It is nice to have you on board. With exceptions, I am only interested in growth stocks, i.e. companies that are recession-resistant growing earnings at 20% or more. The reason is that, while value/cyclicals may temporarily show big earnings growth rates in an expanding economy as earnings snap back from the reduced base that existed during the prior economic slowdown, they do not attract the higher p/e multiples that growth stocks can. This is because large investors know that value/cyclical growth can be fleeting and will not pay premium multiples that are part of what drives big price growth.
There can be exceptions, like anything else. In '87, cyclicals like Caterpillar (CAT), International Paper (IP), and others in the steel, aluminum, copper, paper, chemicals, and energy groups led and put up nice gains, but that was amid a backdrop of higher inflation, higher bond yields, and a higher overnight federal funds rate. And the leadership did not last long (under a year).
Q: I've been anxious to get rolling on your options strategy. When I saw your first video, I was a bit uncertain if there was a recommendation to move forward or not since Thursday was the trigger day. So Monday, I was on watch for the DOCU 220 call.
The price fell all day, and I waited till 15 mins prior to close per suggestion. I decided to dip my toe into the options water and took a small 2-option position of DOCU Sep 18 205 calls. This was very slightly out of the money, and the expiry was after the scheduled earnings announcement per your guidance. It was well below the 220 discussed on the video. Monday I watched your commentary to not buy if there is weakness...yikes. However, DOCU seriously climbed today, and the option hit the 40% profit threshold. By the time I sold it was over 50%. The calculation: open [email protected]$13.77 - $1.3 commission for a cost of $2,755.30 close $20.70 - $1.30 commission for a net of $4,138.70 and profit of $1,383.40, or 50.2% in 2.5 days.
I could use some more education on buy/sell mechanics. How do I enter bid and ask thresholds/price? Doing so at market seems risky. On stocks I can use stops. When I went to close my position today, I chose a price between the bid and ask with a stop and the system (Fidelity) would not accept the price stating it had to be higher than current price. I sold at market since I was up over 40%. I was very tempted to hold the option longer since there is plenty of time before earnings....but the rule says get out at 40%.
A: I am pleased to learn of your success with the DOCU options trade idea. That trade covered nearly two years of premium membership to the service. I would suggest speaking with your broker to see how you can place an entry order at either the ask or midway between the bid and the ask or between the midpoint and the ask. If the spread is wide, you can try halfway between the mid and the ask. There is really not much more to it than that. We seek the most advantageous entry price, but we also are cognizant that often we will get the order executed at the ask or even above that if we place a market order. The advantage in options on the liquid glamours is that they are highly liquid with relatively tight options spreads most of the time.
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All stock charts created using MarketSmith unless otherwise noted. ©2020 MarketSmith, Incorporated. All other charts created using TradeStation. ©2001-2020 TradeStation Technologies. 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 positions in COUP and SHOP, though positions are subject to change at any time and without notice. Estimate data provided by FactSet. Expected earnings release dates provided by EarningsWhispers.