January 5, 2020

Stocks eased Friday as the crisis in the Middle East unfolded. To the averages' credit, they finished in the middle part of their Friday high-low range.

While it is to be remembered that geopolitical incidents often result in buying opportunities, the best course of action will be to let the market tell its own story.

The strength shown in the computer - enterprise software group of two weeks ago, mentioned in the last Marder report, did not continue last week. In fact, the group saw its RS rank fall from 77 to 64. The semis continue to lead the market, while the biotechs have lagged recently after peaking six sessions ago.

Overall, while the bull market continues apace, the post-breakout follow-through of growth stocks has left something to be desired. For this reason, it is logical to operate with a less-than-fully-invested position until better action is seen from breakouts.

On the bright side, our short-term swing ideas continue to perform up to expectation. System R closed its 15th trade since its September introduction, with 10 wins and 5 losses thus far, resulting in a 67% win rate, matching our goal. The bread and butter system has produced roughly 35 trades since its June 12 introduction, with a similar 67% win rate approximately. The most recent bread and butter trades will be updated this week so the performance of both systems can be compared.

As a rough estimate, the 2019 annualized return of all the swing ideas thus far comes to about 33R or 34R. Once the exact calculations are complete, you will be provided with the steps used to annualize the return.

Among the names, Applied Materials (AMAT) is a bellwether among the semiconductor crowd. Most Wall Street analysts look for earnings growth of 24%/17% in the October ‘20/’21 fiscal years. Revenue growth has been -14% and flat in the last two quarters. A 94 RS stock in a 98 RS group with B+ acc/dis rating.

AMAT forms a seven-week pattern with a reasonable 13% depth. The stock can be taken above the 63.07 pattern high. This is considered a liquid glamour and may pursue a slower rate of appreciation than other names. With that said, there are times in any market cycle when the liquid glamours tend to outperform their smaller counterparts as large investors prefer perceived safety and lower risk. Earnings expected Feb. 13 (unconfirmed)

Cardlytics (CDLX) is the top-ranked enterprise software maker in terms of its 99 RS rank. Losses are expected for '19/'20, while sales grew 37% and 63% in the last two quarters. The stock shows an A- acc/dis rating.

The stock forms a four-week shelf that resembles a mini cup-with-handle. It can be taken above the 65.43 pattern high. Earnings expected Feb. 11 (unconfirmed).

MKS Instruments (MKSI) is predicted to record earnings growth of -44%/42% for this year and next. Sales shrank 17% and 5% in the two recent quarters. A 90 RS stock in a 98 RS group with a B- acc/dis rating.

Price forms a 10-week flat base with an attractive 12% depth. It is buyable on a takeout of the 115.12 pattern high. Earnings expected Jan. 22 (unconfirmed).

Paycom Software (PAYC) shows earnings estimates of 28%/25% for '19/'20. Sales expanded 31% in each of the last two quarters. A 95 RS stock in a 64 RS group with a B+ acc/dis rating.

Price forms a base-on-top-of-a-base and can be taken above the 279.95 pattern high. Earnings expected Jan. 28 (unconfirmed).

RingCentral (RNG) is an enterprise software issue with estimates of 5%/15% for ‘19/’20. Sales have expanded steadily: 6 of the last 7 quarters have shown 34% growth. A 95 RS stock in a 64 RS group with an A- acc/dis rating.

The stock forms a 12-week base with 17% depth. The weekly chart shows the current consolidation is normal within the bigger picture. It is buyable above the 177.99 pattern high. The ’20 estimate is unimpressive, admittedly. The robust and extremely steady revenue growth, the constructive chart pattern on both daily and weekly TFs, and the rapidly improving group RS rank comprise the thesis. Earnings expected Feb. 3 (unconfirmed).

Servicenow (NOW) is an enterprise software name with earnings estimates of 30%/30% for '19/'20. Sales rose 32% in each of the past two quarters. An 83 RS stock in a 64 RS group with a B acc/dis rating.

NOW forms a five-month consolidation. It can be taken above the 303.17 pattern high. Earnings expected Jan. 29 (confirmed).

In sum, a partial long exposure is warranted given the underperformance of the growth sector and the lukewarm post-breakout follow-through of a number of names.

Kevin Marder

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Unless otherwise noted, charts created using TradeStation. ©TradeStation Technologies, 2001-2019. 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. Expected earnings release dates provided by EarningsWhispers.