Wednesday’s reaction to the Fed announcement was not a pleasant one, as both Nasdaq Composite and S&P 500 indices sold off substantially on heavy volume. For the Naz, the downdraft placed the growth index ever closer to bear market territory, now 19.0% off its high.
The S&P, 15.4% off its bull market high, printed the heaviest volume in three months. This is viewed as a slight positive, as higher volume is an ingredient in a selling climax. A climax would clean out the sellers, at least temporarily.
Of note is that the bear market rallies in both averages have shortened as things have progressed. If anything, this increased urgency on the part of sellers suggests a likelier chance of a sharp descent into a climax.
A bear market either wears you out or scares you out. It would be preferable to see the averages get their potential damage out of the way sooner rather than later. Either way, we are prepared for whatever is thrown at us.
For a long-only player, protecting precious capital in the safety of cash is obviously the place to be. For two-way players, the short side of the market suffers when prices drop without much in the way of a shortable pullback to present attractive entrance.
We were fortunate to get a pullback in the averages last week that was shortable via a long inverse 2x SPY position (symbol SDS), profitable, and relayed to premium members via the private blog. I anticipate more going forward, but the timing of when they might occur is unknown. While only technicals are used in shorting, thematic shorts are preferred, where there is a bigger-picture catalyst impacting a market segment. This has the effect of sailing with the wind at one's back.
An example could be the liquid glamours due to their premium price-earnings multiples, which usually subject them to the biggest losses in a bear market. Or it could be the financials due to the flattening yield curve that is trending toward inversion, and which crushes banks' profit margins. Another example would be energy, what with the precipitous drop in crude oil.
Otherwise, the following are names discussed in previous posts. They stand out, along with others, in the long-side watch list, which is now at 20 issues. None should be bought due to the straight-down move in the averages.
Alteryx (AYX) is one of a relative few growth stocks that has withstood the selling pressure engulfing the rest of the market. A 99 RS stock, though with a D+ accumulation/distribution rating from O’Neil over the medium-term. The relative strength line has straightened over the past four weeks.
Everbridge (EVBG) is another growth stock that would undoubtedly be popular among large investors if market conditions were ripe for speculation. Note the slope of the RS line and its hitting new-high ground way ahead of price. Wednesday’s 4% gain came on +119% volume.
Chegg (CHGG) was mentioned in the Sunday report (“This is worth watching, but given the behavior of the averages, it should not be taken without at least some general market firming”). Note the very straight RS line which moved into new-high ground a few days ago, well ahead of price.
Five9 (FIVN) is another name whose RS line struck new-high ground earlier this week, well ahead of price which is 13% from its high. It is rare to see so many issues with RS lines so far ahead of price.
Okta (OKTA) was noted in the Dec. 12 report (“The three-month chart pattern is not tight enough to warrant much attention, but OKTA deserves monitoring in coming weeks”). This will need more time to calm down, but its relative strength (its rank is 98) and chart pattern augur well for its future leadership potential.
Ra Pharmaceuticals (RARX) is doing a good job of remaining stout despite the general market malaise. Its pattern should continue to smooth as it moves on from its primary offering of stock last week.
In sum, long-only subscribers should remain in a 100% cash position. If and when short-selling opportunities arise, they will be relayed to premium subscribers via the private blog.
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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.