December 16, 2018

The song remains the same in the stock market, with the latest rally lasting all of two days before Wednesday’s reversal and the downdraft of Thursday and Friday.

Within the growth sector, there has been some nice outperformance over the past month in the security softwares and social media. The latter is up 5% since then vs. the -4% of the Nasdaq Composite. The chart patterns themselves, though, are another story and their brokenness needs technical repair.

The financials, in particular the banks, have fallen sharply over the past eight sessions, perhaps due to fears of an inverted 2s10s yield curve. This will be another group, in addition to the liquid glamours (Facebook, Amazon.com, Apple, Nvidia, Adobe, Alphabet, Netflix, et al) and the index ETFs that we will be targeting from the short side for premium subscribers.

Names that move down rapidly, e.g. Goldman Sachs (GS), do not offer rallies of substance to short into. Everyone is trying to get out the door at the same time and there is simply not enough lasting buying to offer much in the way of advantageous entries on temporary strength. I am actually working on something that is hoped will offer more short opportunities.

Otherwise, the few names discussed in this report below, along with other watch list stocks, represent growth issues that are in various stages of technical repair. None should be taken from the long side until general market conditions improve. Some of them do not contain the size of earnings estimates for ’19 that presented themselves earlier this year and earlier in the bull market.

I have chosen to include them and the other watch list names since they are believed to be the best out there at this moment. In the right market, other and better titles will likely come along as emerging leaders.

So we continue to remain diligent and do our homework as to the available setups. Along these lines, I learned a valuable lesson during the spring of ’97. At the time, the market was going down due to rising bond yields. Things appeared bleak.

Then, all of sudden, in the five-day period of April 29-May 5, about 120 growth stocks completed their bases on volume, essentially coming out of nowhere. This sparked a nice market rally and showed that anything can happen at any time. The antidote for this is to be prepared at all times with a working knowledge of who the leaders are and what they are doing.

Among the names, Akcea Therapeutics (AKCA) is a drug developer with a loss expected in ’19, though revenue expanded 94% in the recent quarter. A 97 RS stock with a B+ accumulation/distribution rating from MarketSmith. This is one of only nine names on the watch list with an A/D rating of B+, A-, A, or A+.

The stock grabbed my attention last year when it came public at 8 and 11 weeks later had jumped to 31. It has in essence been in a big base-building mode since then, breaking out three times and failing each time.

It is a good ways (24%) from its prior high, but merits monitoring due to the overall lack of growth-stock participation in this cycle. Since Oct. 25, it is +40% vs. -6% for the Nasdaq and -4% for the S&P.

Chegg (CHGG) is a provider of educational material in the form of textbooks to college students. Earnings estimates are for growth of 79%/26% in ‘18/’19, and revenue grew 19% in the recent quarter. A 96 RS stock with an A- accumulation/distribution rating. Since Nov. 20, price is up 17% vs. a flat Nasdaq and -2% S&P.

The stock forms a three-month double-bottom base, and sits 11% from the base high. (While O’Neil believes a double-bottom base must have a lower low in order to shake out weak holders and be considered a double bottom, my belief has always been that a double bottom can have a higher low. It is the twin lows that make it what it is. In fact printing a higher low can even be interpreted more positively since price encountered demand at a higher level than when the first low was made.)

This is worth watching, but given the behavior of the averages, it should not be taken without at least some general market firming.

Coupa Software (COUP) shows earnings rising from an estimated 13 cents a share in the January ’19 fiscal year to 20 cents in the ’20 year, a 54% increase. Revenue swelled 43% in the recent quarter. A 95 RS stock with a B- accumulation/distribution rating.

Price forms a constructive consolidation. In the right type of market, we would use the 69.77 high of 11/8 as a cheater entrance pivot. In the current market, we will respect the inability of growth-stock breakouts to make headway by waiting for some better general market health.

Everbridge (EVBG) is an enterprise software developer with a loss expected in ’19. Sales, however, increased 43% in each of the last two quarters. A 95 RS stock with an E accumulation/distribution rating. We would not be keen to buy an E A/D rating, but EVBG is expected to show a better A/D by the time it puts in more time rising up the right side of its base.

As well, this is admittedly a sloppy pattern. However, for a market that has gone through a clean-out of growth titles, something like this that is +23% since Nov. 20 vs. a flat Nasdaq can at least be monitored for future improvement.

Five9 (FIVN) is another enterprise software maker. The group was one of, if not the biggest, gainer in recent years among technology segments. The stock shows a slowdown in estimates, from +364% in ’18 to +14% in ’19. Revenue expanded 30% in the recent quarter. A 95 RS stock with a B- accumulation/distribution rating.

Price forms a three-month consolidation. This is another situation similar to COUP above in which the right side of the base offers a cheater entrance pivot. Again, we would prefer to respect the market’s disaffection with growth-stock breakouts by waiting until institutions show more of a risk-on sensibility.

Illumina (ILMN) shows earnings expected to grow 11% in ’19. Sales rose 19% in the recent quarter. A 94 RS stock with a C accumulation/distribution rating.

Price forms an 11-week consolidation which needs more time in order to settle down without its wide-and-loose behavior. However, its 12% distance from its prior high is less than most growth stocks.

In sum, long-only subscribers should remain in a 100% cash position. As discussed in the spring '97 example above, it rarely pays to turn one's back on the market for very long.

Kevin Marder

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Unless otherwise noted, charts created using TradeStation. ©TradeStation Technologies, 2001-2018. 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.