January 18, 2018

Historically, there has been an average of two particularly auspicious times to acquire stock each year. The current period, which began the day after the new year, is considered such a time.

Critically, more fundamentally sound growth names have been building and breaking out of bases than at any time in recent memory. This is the key factor that differentiates this period from any other in years.

In terms of longevity, the market has an important factor on its side: breadth. A primary (i.e. long-term) bull market does not usually top all at once and descend into a new bear. First it must go through a phase of decay in which, one by one, stocks top under the guise of new highs in the S&P and Nasdaq.

This occurs as participants rotate out of riskier growth and small-/medium-sized stocks and into value/cyclical/large-cap issues. This creates the illusion of a healthy market since the averages, dominated by larger value/cyclical issues, are setting new highs.

Eventually, the weight of the general market, i.e. the average stock, is too much for the averages to bear, and they, too, top and begin a bear market.

Normally, such a pattern takes four or more months of divergence between the average stock and the averages before the bear market sets in. Since there is yet to be a divergence between the cumulative daily NYSE advance-decline line, the market has bought itself some time to move higher, though not without the risk of a meaningful correction.

It is the breadth, volume, and leadership of the advance following the next correction that will go a long way toward providing an important read on health.

Meanwhile, Tuesday morning’s reversal in the market is a reminder that speculative growth names will usually show bigger losses in any general market correction vs. the liquid glamours. The latter are issues expected to show earnings growth of 20%+ in the next year, are outperforming the S&P 500, and offer deep liquidity.

There are not many liquid glamours in any market cycle. The simple reason is that by the time a company becomes large and very liquid, its product cycle has matured to the point that it can’t grow earnings at 20% or more. The fact that it has even grown to being a large company is itself a reason for a pat on the back. But the earnings growth doesn’t come with that, normally.

This leaves a small trove of outstanding actors that become outstanding by virtue of their rarity. These become “must-own” names among institutions who have mandates to invest in growth issues, not value.

In today’s market, these include AMZN, NFLX, GOOGL, ADBE, PYPL, AAPL, CRM, FB, and BABA.

Among the names, Netflix (NFLX) is favored. I very much like that it had an extended period of basing before its recent breakout. Also a plus is its ability to break out before most other growers. But it is extended above its pivot by 8% and should not be chased. The estimate for 2018 is a scorching 83%. Worth watching for pullback possibilities. No chasing.

While Amazon.com (AMZN) is a name everyone feels comfortable owning, fresh-money buys should be avoided due to it being 7% extended above its base top.

Sina (SINA) has an enviable 40% earnings growth estimate for 2018 along with six quarters of revenue acceleration. It is inches away from the top of a three-month base. It has a 92 industry group rank. The breakout can be taken above the base top of 119.20.

Adobe Systems (ADBE) is pegged to show 29%/22% earnings growth in the November 2018/2019 fiscal years, per Wall Street analysts. Revenue growth has been very steady in recent quarters. Friday the liquid glamour broke out of a six-week flat base on 64% higher volume than average.

It is 5% above the base’s pivot point, which is generally the most one wants to see in order to avoid buying an extended stock. So it is on the borderline here, but the preference here would be to wait for it to pull back as opposed to buying it right here.

Myokardia (MYOK) is a biotech company expected to show a loss this year, and thus represents higher risk. What is interesting is that price went from 12 to 49 in just three months. It has since corrected one-third, which is normal after such a giant move.

MYOK then formed a three-month base from which it broke out last week. Volume was +208% (above average) as it moved past the cheater entrance point of 43.90 and +67% on the day it cleared the base top. It has idled the past two days and can be watched for at least a few more days of backing and filling before an entrance is contemplated.

Paycom Software (PAYC) should show about 24% earnings growth this year, per the Street. While certainly respectable, this is not exactly barn-burning performance. What is interesting is that it broke out of its six-week consolidation on volume +117% above average. This shows real conviction among investors.

PAYC could be taken here around Wednesday’s close of 88.35, or 3% past its entrance pivot.

Nutanix (NTNX) is cloud platform entity. While losses are anticipated in the July 2018/2019 fiscal years, the company’s revenue growth is steadily robust, at 67%, 62%, and 65% in the last few quarters. It is under extreme accumulation as it forms a six-week base flat base. The stock can be taken above the 1/9 high of 38.80.

Shopify (SHOP) is another enterprise software developer with earnings per share expected to jump from 5 cents in 2017 to 26 cents this year. Revenue growth has been torrid, with 75%, 75%, and 72% rates seen in recent quarters.

SHOP’s base is wider and looser than preferred, but let’s see what accumulation days show up as it gets closer to its entrance pivot, 7% away. In the meanwhile, there is a cheater entrance pivot just above the current price of 114.91, at 117.07.

Given the lack of any major accumulation days in months, this cheat point is best left alone in favor of the formal entrance pivot at 123.94.

Baozun (BZUN) shows expected 2018 earnings growth of 71%. The Chinese operator of online retail properties forms a four-month consolidation. The entrance pivot is 40.65, about 9% away.

Mazor Robotics (MZOR) is expected to post a loss this year, yet revenue has accelerated from 59% to 125% over the past few quarters. The stock more than tripled at one point on a y-t-d basis during 2017.

It is currently forming a 10-week double-bottom base and is about 10% from the base top of 65.97, where it can be taken assuming strong volume on the breakout day. There is a lower cheater entrance at 63.75.

Mongodb (MDB) is a database platform developer. This is a very speculative issue with attendant higher risk. While MDB is expected to lose money in the January 2019 fiscal year, revenue has grown by 51%, 51%, and 58% in the last few quarters.

It jumped more than 40% at one point on its initial offering day in October. It has since been forming its first base, a sloppy cup-with-low-handle. The pivot point of 30.49 is 3% away. For big risk-takers only.

RISE Education (REDU) is similar to MDB in that it is an October new issue that is working on its first base. REDU’s pattern is tighter and sounder than MDB’s. This is also a company expected to make a profit this year, 126% more than the estimate for 2017. Revenue growth has been 29% for each of the past two quarters.

Technically, the pattern is a three-month cup-with-handle and the pivot of 15.67 is 5% away. Like MDB, this is for those who understand the elevated risk that such an issue entails.

Square (SQ) provides a popular software that manages point-of-sale transactions. Earnings are expected up a hefty 73% this year, while revenue has accelerated for the past three quarters and stood at 33% in Q3.

SQ forms a seven-week consolidation from which it is pulling back. Those who don’t mind buying a good distance from a base top might give it a few more days of sideways action before looking at the 1/11 high of 43.08 as a cheater entrance point.

I am usually not a fan of buying halfway up a base, unless the averages are emerging from a bear market. But SQ was up as much as 250% in 2017, has the big estimate going for it, and is under solid accumulation. For low-level base fans.

In sum, bull markets normally take an extended period of time to top, as stocks roll over a few at a time. This contrasts with bottoms, which generally occur as many stocks trough all at once. A good indication that a long-term top is imminent often occurs when the cumulative daily NYSE advance-decline line cannot confirm new highs in the averages for three or four months. This has not transpired, and effectively gives the bull market some time.

In the meantime, many growth stocks are forming or have already broken out of bases. Position traders can take some of these or can wait until some of the first breakouts, e.g. NFLX, pull back.

The most important thing is to ignore the news, which will almost always be good at a top, and let the market tell its own story.