December 9, 2018

The averages appear to be in a testing sequence, whereby they are revisiting the area of their October and November lows. The average Nasdaq stock lagged the Nasdaq Composite on the most recent up leg as shown in the chart below.

We have yet to see a market that rewards breakouts with follow-throughs of 20%-25% post-breakout. That is the real litmus test of the speculative sentiment. The “speculative sentiment” refers to a certain amount of risk-taking behavior among market participants. It is necessary to support a durable bull market: Someone has to take chances. It is best seen when names with above-average risk, e.g. growth stocks, build basing patterns and break out of them en route to 20%-25%-plus gains.

A high amount of speculative sentiment was seen earlier this year when recent new issues were bought up with ease. That type of sentiment, while welcome, can become excessive, i.e. frothy, eventually toppling a market.

However, seeing defensive groups with reliable, more conservative, recession-resistant earnings streams outperform the S&P in a mature bull market is decidedly a market that is devoid of speculative sentiment. It most often reflects a market concerned with slowing economic growth. I have been noting this on the Twitter feed for some time, and have referred to it in a recent video.

These defensive segments include the utilities, foods, beverages, tobaccos, drugs, REITs (real estate investment trusts), household products, and select retail, such as auto parts, drug stores, and supermarkets.

During periods like this, I have never felt anxious or with a need to jump back into stocks. Letting the market come to us is the best approach from a reward-to-risk standpoint. Return of capital is always more important than return on capital.

(Personally, since moving to 100% cash on Oct. 2, I have taken two pilot buys, Tilray (TLRY) in mid-October and Staar Surgical (STAA) on Nov. 7. Both were stopped out quickly.)

But can’t some of these defensive stocks be bought as they break out? They can, but their earnings growth estimates for ’19 are often in the 4%-10% range. This limits how much their price-earnings ratios can expand. They are a good hideout for institutions with a mandate to always be fully invested. But buying them expecting a 20%-25% follow-through post-breakout is unrealistic.

Our game plan remains the same: To protect precious capital by staying in cash until the averages show some firming and leading growth titles show breakouts with follow-through. In the meantime, liquid glamour tech issues (e.g. the FAANGs) and inverse ETFs will be monitored for a short opportunity.

The following are the best actors from our watch list, and are ones to make note of once the environment brightens.

Alteryx (AYX) has a few things going for it despite the Street’s belief that it will post a small loss in ‘19. Revenue growth has accelerated in the last two quarters, from 50% to 54% to 59%, price has outperformed the S&P in nine of the last 11 sessions, and it is in a growth group (database software). A 98 RS stock.

Caredx (CDNA) is a 99 RS stock that has tried to come out twice, both times meeting with sellers who forced it back into its base. Nevertheless, there seems to be a steady underlying bid to the shares which have been able to hold the 50-day line for the most part. Worth watching, as very few growth issues trade this close to their 52-week high.

Chefs’ Warehouse Holding (CHEF) has a solid 27% earnings growth estimate for ’19, though revenue growth was 11% in the recent quarter, less than preferred. A 98 RS stock in a 99 RS group, miscellaneous food.

Price cleared a cheater entrance pivot of 37.63, but did not break out of the base high of 39.26 before encountering selling. Still, it shows a steady pattern of outperformance over the past eight weeks.

Servicenow (NOW) is the type of stock that could easily be seen among emerging leaders if the general market was to turn tomorrow. It has outperformed the market for 10 of the last 12 sessions and its RS line leads price higher, always a plus. The ’19 estimate is for 33% growth and sales expanded 37% in the recent quarter.

NOW is building a 12-week consolidation pattern. The pattern needs to tighten up. We would respect the general market’s state by not using the 194.04 cheater entrance, but instead waiting for the formal breakout if not something closer to the 200 level.

Sunrun (RUN) is similar to NOW (just above) in that respect should be accorded the general market by not taking the stock above the top of its three-day handle. Waiting instead for a formal takeout of the 16.45 pattern high would be a more deservedly prudent means of entry.

The Trade Desk (TTD) is another unusual growth stock that has remained popular enough not to languish 30%-plus off its 52-week high like some other growers. Mutual funds holding the advertising services provider total 432, within the 400-1,100 range that is preferred for medium-sized growth names. A 99 RS stock.

TTD has a very low level of earnings volatility historically, and is likely the reason why it is performing well relative to other growers. The stock is three days into a handle and is worth watching.

Twilio (TWLO) is one of the most, if not the most dynamic growth stocks discussed in this report. The enterprise software specialist shows ’19 earnings to grow an estimated 45%, while revenue growth has accelerated from 41% to 48% to 54% to 68% in recent quarters. A 99 RS stock.

It is forming a four-week shelf with a 28% depth, excessive for such a short pattern. Due to this, the stock would seem to need more time to base before an attractive entrance appears.

In sum, subscribers should remain in a 100% cash position. Rather than try to predict when the market will inevitably form a durable bottom and embark on a tradable advance, we will let the averages and leading titles tell their own story.

For opinions are often wrong. The market usually is right.

Kevin Marder

For intraday ideas and analysis: https://twitter.com/mardermarket

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.