December 23, 2018

Stocks recorded their worst week since October ’08, as the Nasdaq Composite exited Friday with a 22.5% drawdown off its Aug. 30 high. The S&P, meanwhile, stood at an 18.1% decline off its high.

A couple of mild positives emerged from the week. First, NYSE volume was higher on Wednesday, Thursday, and Friday than on any other day since the decline began. This, plus the size of last week’s fall, raises the possibility that the market may have begun a capitulative phase that could lead to a selling climax. This is one potential scenario.

The second positive from last week is that the relative strength line in the Nasdaq did not hit a new low to confirm the low in price. Since the Naz represents the index with the highest risk among the big three averages, it would follow that it would underperform in any market decline. Since we always take note of the unexpected, this is noteworthy.

The chart below shows it did lag the S&P last week, but not enough to take out its mid-November low in the RS line.

With no long exposure to stocks, last week’s plunge was viewed as a positive if it meant the market is closer to the day when the last investor who wanted to get out is out.

As noted in the Twitter feed: “Given that selling is how a durable bottom is formed, not buying, the steepness of the sell-off is not the worst thing in the world, as it hastens the day when everyone who wanted to get out has gotten out.

The negative to such a uni-directional move is that, without rallies, the opportunity to sell short is simply not there.

Meanwhile, the days of buying breakouts in the liquid glamours (FANG-type) will again return in the next bull. But the names themselves will be different. O’Neil research indicates the average big-winning stock in a bull market will correct by 73% in the ensuing bear. This is why investors should not be complacent when it comes to recognizing technical damage to former leaders.

Indeed, with Apple (AAPL) showing earnings estimates of “just” 12%/10% for the Sept ‘19/’20 fiscal years, Facebook (FB) showing 1% for ’19, Alphabet (GOOGL) 13%, and Nvidia (NVDA) -1%, it is unlikely any of these institutional must-owns from the last bull market will come back to lead in the next.

This underscores the importance of keeping abreast of current leaders, who they are and what they are doing. In most cases, it is the names that hold up the best during a sell-off that become the emerging leaders in a brand-new bull market.

Along these lines, the watch list has been reduced to six names, about the number that existed earlier in the year.

Among the names, Atlassian (TEAM) was a big winner in the bull market and hails from the computer software segment, a hotbed of leadership. Earnings growth is forecast at 50%/24% for the June ‘19/’20 fiscal years, and sales expanded 37% in the recent quarter. A 97 RS stock with a B- accumulation/distribution rating.

The stock forms a cup-with-low-handle and sits 10% from the pivot point, which is the handle high. Despite being a full 17% from its price high, its RS line hit new-high ground Friday. This is quite unusual, and is a positive. The stock offers attractive entrance above the 89.82 handle high, though for the time being all long entries should be placed on hold pending improvement in the general market.

Five9 (FIVN) continues to form a constructive base as it undercuts its 50-day line. A negative was Thursday’s action, which saw it undercut its prior swing low, turning the short-term trend down. It remains on the watch list due to its relative performance over the past month, when it has handily outperformed the Nasdaq by a score of 8.4% to -8.3%.

O Reilly Automotive (ORLY) was a recent addition to the watch list. Earnings growth at the auto parts retailer is expected to be 11% in ’19, with single–digit revenue growth in the recent quarter. This is a favorite of institutions due to its highly stable earnings growth (annualized standard deviation of earnings is an extremely low 3%). This month, it has outperformed the Nasdaq by -4.6% to -14.9%.

Its inclusion on the watch list is symptomatic of the current market condition. It forms an unusual pattern called an ascending base. Such a pattern will sometimes occur during a bear market.

Planet Fitness (PLNT) has a ’19 earnings estimate of 18% along with sales that grew 40% in the recent quarter. The stock’s pattern looks like it is beginning to come apart after it took out its 50-day line on +53% volume on Friday.

It is being left on the watch list for now due to its impressive relative strength line, showing a 7.5% gain since early November vs. a 13.6% loss for the Nasdaq.

Vocera Communications (VCRA) is forecast by the Street to grow earnings by 25% in ’19. The healthcare communications specialist has an RS rank of 97 and a B accumulation/distribution rating. Revenue increased by 5% in the recent quarter.

After failing on its first breakout attempt in mid-November, its second attempt resulted in a 14.8% gain before the reality of the general market forced it lower. It now stands 12% off its high as it pulls back to the top of its prior base. This will need substantial backing and filling before it offers attractive entrance.

In sum, general market conditions continue to warrant a 100% cash position for the long-only player. Premium subscribers will be alerted for any short-selling opportunities as they present themselves.

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.