December 26, 2018

Stocks staged a reaction rally Wednesday, leaving behind lows that are 23.9% and 20.2% off their intraday highs for the Nasdaq and S&P, respectively.

There is truth to the notion that the biggest rallies occur in a bear market. However, it is not possible to predict whether Monday’s lows will be revisited. This will take some time for the market to sort through.

Bill O’Neil came up with his follow-through day (FTD) concept as a means of dealing with the “Are we there yet?” question. I do not follow the FTD concept religiously as some do. Most will fail in a bear market. Yet it is something to be aware of.

The interesting and possibly bullish thing about this bear market is that the Nasdaq is outperforming the S&P. This is unusual for a bear market and was pointed out in Sunday’s report.

Looking ahead, it is possible that the leadership in the next bull market will not initially be in the growth sector. This pattern was seen in the first six months of the bull that began in October ’02. Then, while growth was busy repairing broken chart patterns, the early leaders were the beaten-down names that had lost the most during the brutal ’00-’02 bear. A few were former growth leaders, but had since lost their growth characteristics and had become cyclicals.

By late-April ’03, six months into the new bull market, growth was finding its legs and bases were beginning to be broken out of.

The upshot is that participants must use care and not simply go back into the former leaders of this past bull. Maybe (AMZN) comes back and becomes a bona fide leader in the next bull. But maybe it doesn’t. Its earnings estimate is still a rosy 35% for ’19. It thus has a better chance of coming back and leading than, say, a Facebook (FB), with its 1% estimate for ’19.

What matters most, however, is being in the names that the institutions want. They provide the octane to make leaders lead.

Over the holiday, I revisited an old swing trader setup that I had not used in a few years. I modified it slightly and improved the win rate such that it appears to be about 75%-80% accurate. The tradeoff is that it does not appear very often.

In trading, there is always a tradeoff. To get more confirmation, one will enter later in the move. To enter earlier in a move, one must sacrifice the confirmation that provides confidence the trade will work. In this case, improving the win rate makes the setup scarcer.

However, by expanding the universe from just growth stocks to also include the SPNDX – what I call the S&P + the NDX (Nasdaq 100) – the frequency of opps will obviously increase. As one example, in 2018 for the SPY, the setup produced nine trades, seven of them winners, or a win rate of 77.8%. (A winner is always defined as +1R.)

Nine trades in a year for one symbol isn’t many. Hopefully, the expanded universe will provide more. We’ll see what happens in real-time.

The following is a rundown on some of the names from the Watch List, with the proviso that most need more work on their bases.

Atlassian (TEAM) was discussed in Sunday’s report (“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”). The accumulation/distribution rating of B- is the second-best of the 12 Watch List names.

This remains a favorite, in part due to its RS line slope, but the general market health tempers its buyability.

Etsy (ETSY) was added back to the Watch List. Though 19.6% off its high, it has nevertheless held up better than 95%+ of all growth stocks. The estimate for ’19 is a healthy 42% and revenue increased 41% in the recent quarter.

The pattern is choppy as it remains under distribution (D-) but is worth watching.

Five9 (FIVN) has a mediocre 14% estimate for ’19, a better 30% sales growth rate in the recent quarter, and one of the best patterns in the growth sector.

The 45.58 high of Nov. 7 is a suitable cheater entrance pivot, and the RS line slope is very good for any growth stock, but the general market has us in a wait-and-see mode with FIVN, as well as the others listed here.

Servicenow (NOW) has an estimate of 33% for ’19 and 37% revenue growth in the recent quarter. It appears to be beginning to form the right side of the right shoulder of a head-and-shoulders continuation pattern.

The 192.16 high would be a possible cheater entrance pivot. Until the averages firm up, this should not be taken.

Shopify (SHOP) was mentioned in the Sunday video. It is a long way from being buyable, however it is worth tracking since there are not many growth stocks with a triple-digit earnings estimate for ’19. The Street looks for 126% from SHOP. Revenue was 58% in the recent quarter. But its accumulation/distribution rating is the lowest possible, E.

Technically, the pattern meets the definition of wide and loose. However, this is not out of the ordinary if one considers the stock ran up tenfold from ’15 to ’17. Again, lots of work needs to be done here before it is buyable. But by the same token, few stocks have fundamentals this dynamic.

Twilio (TWLO) was added back to the list today. Its 13% gain Wednesday topped the other Watch List members as it crossed the 50-day. One of the better growth actors in the market, with a 45% estimate for ’19 and 68% sales growth in the recent quarter.

Like everything else on the list, TWLO is not buyable, but represents one of the best as it works on the right side of its pattern. One sign of its strength is that it hit a new high nine days ago while many of its growth stock brethren were in their own bear market.

In sum, general market conditions continue to warrant a 100% cash position for the long-only player. Anything of import that occurs Thursday will be relayed to premium subscribers via the private blog. Otherwise, we play things one day at a time and maintain an open mind as to what the market could do.

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.