December 18, 2019

With positive developments on the U.S.-China trade talks, stocks gapped higher Monday, leaving the Nasdaq stretched above its 9 ema. Tuesday and today showed some churning, especially today, with its major volume without much further price progress. Technically, then, it would appear a logical time at which the averages might take a breather.

As the chart below shows, the important software segment has lagged for the past three weeks. This is actually part and parcel of a larger stall in the growth sector, as evidenced by the RS line for the IBD 50 growth index lagging for the past four weeks (not shown). This has stymied progress for some of our triggered trades, which lacked the post-breakout follow-through we had been accustomed to during other buying opportunities this year.

There was some improvement in our software positions this week. There are a few exceptions in the software segment that are bucking the lagging trend. Shopify (SHOP), which is close to the top of a constructive base, would be one. Model N (MODN), a triggered trade, and another enterprise software name, is another.

 

The game plan will be to de-emphasize software issues and focus more on the semiconductor group, which continues to lead the market, as does biotechnology. Semiconductors are expected to see sales growth from a variety of sources, including artificial intelligence (AI), robotics, automation, driverless vehicles, electric vehicles, and virtual reality. Gold stocks do not show enough broad strength to warrant exposure at the moment, but this group will be monitored closely, as a couple of them set up.

Among the names, Crox (CROX) has earnings growth estimates of 85%/24% for ‘19/’20. Sales rose 9% and 20% in the last two quarters. A 97 RS stock with an A acc/dis rating.

Price forms a six-week consolidation with 16% depth. Two weeks ago, it found support at the 50-day line, just above the high of the prior, nine-month consolidation, two pluses. Today, price cleared the top of its current consolidation, +1.9% on volume 28% below average. CROX can be taken above today’s high of 39.36, less than 1% above the pattern high. Earnings expected Jan. 29 (unconfirmed).

KLA (KLAC) is forecast to post earnings growth of 18%/11% in the June ‘20/’21 fiscal years. Sales increased 18% and 29% in the last two quarters. A 96 RS stock in a 99 RS group with a C acc/dis rating.

The stock forms a four-week shelf with some pronounced distribution on the left side of this pattern. This has yielded to mostly accumulation days on the right side of the formation. Since the Dec. 3 reversal day in the averages, KLAC is up 12.1% vs. 3.6% for the Nasdaq and 3.2% for the S&P. Of the three semi equipment makers discussed in this report, KLAC has performed the best since the Dec. 3 session.

Price is 2.7% from the 179.95 high of its shelf and is buyable on a takeout of this level. Earnings expected Jan. 29 (unconfirmed).

Lattice Semiconductor (LSCC) shows earnings growth estimates of 76%/16% for ‘19/’20. Revenue was flat two quarters ago and inched up 2% last quarter. A 97 RS stock with a B- acc/dis rating.

LSCC forms a three-month consolidation with 21% depth. It can be taken above the 21.58 pattern high. Earnings expected Jan. 28 (unconfirmed).

MKS Instruments (MKSI) is predicted to record earnings growth of -44%/42% for this year and next. Sales shrank 17% and 5% in the two recent quarters. A 94 RS stock in a 99 RS group with a B+ acc/dis rating.

Price forms a seven-week flat base with an attractive 12% depth. It is buyable on a takeout of the 115.12 pattern high. Earnings expected Jan. 22 (unconfirmed).

NMI Holdings (NMIH) should record earnings growth of 53%/24% in ‘19/’20. The mortgage insurance provider has seen sales increase 35% and 42% in the last two quarters. A 95 RS stock with a B- acc/dis rating.

Today the stock cleared the high of its five-week basing pattern, +1.3% on +67% volume. It can be taken above today’s high of 34.74. This is less than 1% past the pattern high. Earnings expected Feb. 5.

Shopify (SHOP) is a unique growth stock due to its unusual combination of very large size (market cap: $50B) and rapid earnings growth. There are only so many stocks in the market with this combination. Institutions with a growth mandate only wish there were more names like SHOP they could place money with.

Earnings are expected to go from an estimated 50% decline this year to a 384% increase in ’20. Sales increased 48% and 45% in the last two quarters. A 98 RS stock with a B acc/dis rating.

Technically, price forms a three-month cup with 31% depth. It can be taken above the 409.61 pattern high. Earnings expected Jan. 28 (unconfirmed).

Solaredge Technologies (SEDG) is an Israeli producer of solar hardware such as inverter systems. The bottom line is forecast to grow 26%/17% in ‘19/’20. A 98 RS stock with a B acc/dis rating.

SEDG forms a seven-week cup with 23% depth, which is considered reasonable. Price is two days into the formation of a handle. Until more time is spent forming the handle, the entry pivot is the 96.69 pattern high. Earnings expected Feb. 5 (unconfirmed).

In sum, while the averages appear stout, the slackness in the growth sector has dulled the performance of some of our post-breakout follow-through. We will adjust by de-emphasizing software issues and focusing on semiconductor, biotech, and niche areas with slower growth than we would prefer.

Kevin Marder

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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 a position in SHOP, 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.