August 5, 2020

A market running out of things to do for an encore nevertheless climbed Wednesday for the sixth session in a row. In keeping with this week's pattern, the high-low range contracted along with softer volume.

Despite the more subdued tone, the week's action is considered a plus, as it allows the market a chance to catch its breath without necessarily needing to pull back. No one told the growth sector that, however, as a number of our Focus List buy ideas -- both recent and not so recent -- pranced over the tape.

It is always a positive to see leading growth stocks perform well during a session or sessions in which market-driving catalysts are few. This is what we have seen in recent sessions, some of it due to earnings.

GSX Techedu (GSX), Enphase (ENPH), Sea Ltd (SE), Square (SQ), Novavax (NVAX), Horizon Therapeutics (HZNP), and Etsy (ETSY) were among the recent standouts. The decision to make certain names forming three-week shelves buy ideas is thus far paying off. Stop-outs, which were more prevalent during the early- to mid-July period, have quieted down. Since the Mar. 23 launch of this bull market, winning trades have comprised about 68% of buy ideas.

There are very few actionable issues for us to sink our teeth into, as most are extended and not technically attractive. Select titles viewed as special, due to heavy sales growth and/or weighty gains in this bull market, have been targeted as possible buy ideas.

We are moving into the most fascinating period of the year. While every year is different, September is known to be a historically poor performer, while October has had more than its share of important bottoms and the November, December, January period represents the best period of the year. What is fascinating is whether or not some of these historical tendencies will play out.

To expand the following charts, please click on them.

Coupa Software (COUP)

Crowdstrike Holdings (CRWD)

Datadog (DDOG)

Elastic (ESTC)

XP (XP)

Zoom Communications (ZM)

In sum, with most individual leaders extended technically, it is becoming a challenge to find buyable merchandise. Fortunately, some of the initial names in this bull market are working on four-week patterns which allows us to target some of these which have been especially strong. Seasonally, we are nearing September, which has sometimes been a treacherous month.

Q&A

Q: Would be interested in your take on the volume of the stocks you discussed you bought today like SE, GSX etc. The volume wasn't great, or do you have a rule for that?

A: Good question. There are no rules I am aware of put out by O'Neil regarding a stock coming out of a 3-4 week shelf. This is probably because his book only speaks of entering on a breakout of a base, which is 4+ weeks long in the case of a square box pattern or 5+ weeks long in the case of a flat base. Through conversations with friends who have run Bill's money (he cannot manage all of his money alone because of size constraints, so he parcels it out to internal portfolio managers), he himself does not limit himself to buying out of proper bases, especially when he adds on to a position.

I did an informal study in 2017 of that year's leading stocks, and discovered that roughly 40%-50% of them came out of bases on volume that was not "confirming," i.e. less than 40% above the 50-day average of volume. For 3-4 week patterns, it is logical that volume will not be confirming due to the shorter pattern length.

What I suggest is that one can always exit a position at the end of the breakout day if the volume does not measure up. This would be for legitimate bases, not 3-4 week shelves. In some cases, volume will be lackluster on a base breakout, only to kick in during the 1-3 days subsequent to the breakout day. Some people like to give it a few days following breakout to see if volume confirms. Personally, if I buy a name such as GSX and volume is not confirming, but price continues to follow through in subsequent days, I will hold the stock.

With big-winning stocks, one has to realize that getting into them can often be a challenge. Insisting that they resemble a textbook example in picture-perfect fashion is not an optimal approach. To prove this, one can review charts of past big-winning stocks to see that many do not have a "perfect, connoisseur-quality look."

I hope this is helpful.

Kevin Marder

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

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 GSX, SE, and SQ, though positions are subject to change at any time and without notice. Estimate data provided by FactSet. Expected earnings release dates provided by EarningsWhispers.