June 14, 2020

The long-anticipated pullback in the averages commenced with a brutal Thursday session. I have always looked on a 1.5% daily loss in the S&P as "substantial" and a 2.5% loss as "serious." The S&P shed 5.9% on Thursday, the Nasdaq 5.3%.

The catalyst for the downdraft was evidence of the feared second wave of Covid-19 infections. Actually, the second wave was not expected to occur until this fall in tandem with the flu season. Thus, this current pickup in infections is a function of the reopening of the country, not the onset of flu season. It was clear several weeks ago that as the reopening took place, there would be a resurgence in the infection rate.

I was therefore surprised that the market -- which sees better than anyone -- kept advancing without pullback amid this looming threat.

To put this in perspective, a normal bull market might last for three or four years, followed by a one-year bear. An intermediate-term, 8%-12% correction occurs on average once a year. The current Nasdaq drop is 6.7% from high to Friday's low. It would be uncommon for the averages to have this type of correction so soon, just 11 weeks into a new bull.

At the same time, the market has broken norms lately by staging the quickest 20%+ bear market decline in history (down 38% in 4.5 weeks for the Naz). Not to mention the record-setting advance off the Mar. 23 lows.

However, we do not factor historical precedent into our game plan. While it helps us understand what we may expect, it never takes the place of the price/volume behavior in the averages and the action of the leading stocks.

The game plan is to allow the averages to settle down long enough to see if there are hints from leading stocks that perhaps the worst may be behind us. This could take a day, a week, or perhaps longer. In the meantime, the Focus List does not have any ideas until the fog clears.

In sum, there have been few 5%+ declines in Nasdaq history. They have generally occurred just before extended advances in the averages. Fresh-money buys are off the table for the time being. This makes all the more sense when we consider pattern setups to be scant in number. We will remain open-minded, flexible, and patient as to when our next cue will occur to begin buying.

Options

Earnings season complicates successful speculation. Often times, a stock will creep up the right side of its base before the report, only to break out before the report. This leaves a speculator with deciding to either take a smaller position on the breakout or missing the breakout entirely in lieu of waiting for the release to come out first. Other times, a stock will break out once the report is released by gapping at the next day's open.

Some people like to play gaps and there are ways to do this, as have been previously discussed. However, any way you slice it, it is an inefficient way to trade breakouts because the first 5%-? of gain is missed. With that said, perhaps that first percentage gain post-breakout is not important if a stock is going to be a big winner.

There is a tendency of large-cap names, particularly in technology, to rise during the 1-2 week period before earnings. Beginning with this next earnings season, I intend to use an options model to capitalize on this tendency. The model was developed by some heavy quant researchers with decades of experience, and whose models are used by institutions around the world to manage in excess of $1T. These quants are known to be authorities in their niche of the quant universe. One happens to be a close member of my family.

The options trades are nothing complicated. They involve buying calls 1-2 weeks before earnings and exiting the position the day before earnings. So the exposure to the earnings report is nil. I intend to make a few of these ideas available to premium subscribers during the next earnings season.

There are many ways to trade options. One way is to use pattern recognition by buying call options when a stock breaks out of a base. When price breaks down out of a trading range, put options are bought. I know someone who makes a living doing this.

Instead of using pattern recognition, I will be using a quantitative model that is based on past history for a particular stock. As a part of each buy idea, premium subscribers will be furnished with the 3-5 year back test results of the strategy for that stock. They show how a stock's options have performed during the period prior to earnings releases. This would include percent win rate, average win, and average loss. Thus, trades would be based on probability and statistics.

In most cases, historical win rates for this earnings anticipation strategy have ranged from 64% to 78%. The reward-to-risk ratio has ranged from 2:1 to 8:1. Of course, past performance is not an assurance, nor is it necessarily indicative, of future results.

The Marder service: a history (for newer subscribers)

The service began in November 2018 with breakout ideas for mainly position traders. In June 2019, a pullback strategy called the "bread and butter" setup was introduced. This was followed in September 2019 by the introduction of another pullback strategy, called "System R." The initial idea behind these two setups was to:

1) provide position traders of growth stocks with a) early entries (prior to the traditional pattern breakout), b) post-breakout entries in case the breakout was missed, and c) post-breakout entries to be used as add-on buys;

2) provide swing traders with setups using S&P 500 stocks.

The objective with the above two pullback setups was for a win rate of 67% using a 1:1 reward-to-risk ratio. The results have not been updated recently, but based on the last update and recent buy ideas, the win rate is approximately 65%. Instead of scalping these setups for +1R, subscribers can use the "trim and trail" method of trade management by taking half off at +1R, moving the stop to breakeven + 1%, and trailing a stop on the remaining half.

Subsequently, beginning in October 2019, these pullback setups were used with these levered ETFs:

TQQQ (3x version of QQQ ETF): 7 wins, 0 losses
NAIL (3x homebuilders): 2 wins, 1 loss
NUGT (3x gold miners): 0 wins, 1 loss
BIIB (levered biotech ETF): 1 win, 0 loss

Total result for levered ETFs: 10 wins, 2 losses, or 83.3% win rate

The overarching goal: to provide additional return sources besides the flagship breakout trades over the course of a year via the pullback setups on S&P 500 names, the pullbacks on levered ETFs, and potentially the option ideas.

Q&A

Subscriber comment: I write not to have you write back but because I see you as the type of mentor/teacher who I would imagine enjoys seeing feedback along the lines of what I humbly share with you below. I saw your gratitude tweets the other day and it is really resonating. Thanks for sharing both of those. I've been a big fan of attitude for a long time, and in particular the Charles Swindoll prose "Attitude." I never associated gratitude being so fundamentally integral to attitude. Thank you so much for that.

I appreciate you, as a person, and as the "Marderreport" Hall of Famer trader. Last night you mentioned you were considering adding an options component to premium members subscription, as a thank you. I wanted to thank you for considering that.

Something that I wanted to work while subscribing to your service was buying the leaders and pyramiding into them. I missed AMZN/NFLX awhile back, and TSLA, and many others, but did manage to pyramid into, first TQQQ, then SQ, and then BYND, and still hold all 3. As you mentioned, one can't confuse brains for a bull market, and I appreciate that, so I know anything can happen, and these trades may go south. But I have my stops in place (mentally) and I will be disciplined in following them. Being able to pyramid into these three is definitely growth for me and that's thanks to you.

I also appreciated your tweet about Bruce Lee and developing multiple set ups. I am developing different setups while watching your videos and incorporating my personal education into this set up. I did take TQQQ on both of your pivots (70, then 80), and I also took my first stake in SQ and BYND on a set up where leaders are coiling along the MAs prior to their breakouts (thanks to you putting them on my radar) and took AMD Monday in a trade that screamed out at me for similar, but multiple reasons. I'm working on this set up to buy leaders during this coiling along lateral price support, MAs, low volatility (which I learned from you) and other factors I'm still working on.

All this is to say, even though I know we're in a bull market, and I feel we're a little extended at the moment, and I know a market can stay extended for awhile, I'm confident what I've learned from you will see me through any market, and for that I am grateful.

KM: I appreciate the time you took in telling me your story. It seems like you have a good grasp on keeping things realistic as far as what could happen in a market that is extended. It is good to hear you are taking some of the TQQQ setups. They hold the potential for one to develop a base return in bull market years like 2019 and this year, regardless of growth stock speculation.

I am pleased to hear of your growth as a trader.  At the end of the day, your happiness and that of all subscribers is the most important thing. 

Q: Thank you for your insights. You probably get lots of messages, so take your time with answering this. Not urgent at all, but important. During the last week I had FRPT in large profit, but closed in a tiny profit when it came down. I am not sure when the price returns to the breakout point. Should I wait or does it mean it wants to go lower (pre-breakout level). It happened the same with AMD. Tiny profit otherwise I would have a loss there. I was hesitant to hold PDD, because initially it showed same behaviour as AMD, closed , but then it ran without me.

Today took big loss on LVGO and NAIL which I had open from yesterday. They gapped down as you noticed. As a simple advice, should I just let my stop loss be hit without moving it too much? And how about losing all that gain FRPT had to almost breakeven? Am I doing something wrong? I understand that S&P500 was overextended and the Fed conference yesterday had a role, so maybe I shouldn't have opened so many trades.

Just trying to improve. I'm new to stocks. I think timing was not great considering Fed and S&P overextended. Promise not to bother you with this kind of questions again. Thank you for all you do.

A: As a rule of thumb, when price rises 8% from entry, the stop can be moved to breakeven + 1%. When price moves up 15%, the stop can be moved up to at least 5% in profit and maybe more. When price is up 20%, the stop can be moved to 10% in profit (with or without exiting half the position) or the position can be exited. The logic behind exiting a position at 20% in profit is that the average stock advances 20%-25% from its pivot and then forms another base.

Some players do not want to sit in a position while it forms another base. These are just suggestions, are not necessarily to be used mechanically, and are not what I use all the time. But they offer a place for you to start with the idea that you will adjust these parameters over time to best suit your unique makeup as a trader. I have previously discussed how to use the moving averages to exit positions that are up 15%-20% or more. I suggest you review this video on money management.

About 40%-50% of all breakouts will return to the pivot point or back into the base. So this is normal and something to expect. The NAIL idea had a suggested stop pivot of the other side of the signal bar (the bar preceding the trigger bar) which is standard for most pullback trades. I was in that trade and exited on the break of the signal bar's low. So no one should have taken a "big loss" as you say unless they were using a different stop pivot.

I suggest you not touch your stop-loss until price rises 8%. This is just a guide: In time, you can adjust this to best suit your makeup.

PDD was tricky, as it had the two sharp pullbacks. Because it was up more than 15%-20% from entry, you would have wanted to use the moving averages as exit guides. It never touched the 20-day line, so the stock should not have been fully exited. It did break the 9-day line twice and closed below it once. That may have been a cue to exit 15%-25% of a position just to lock something in. The remainder would have been subject to a break or close below the 20-day and/or the 50-day, depending on one's makeup.

I hope this covers all your questions. I would not treat yourself harshly: You are new at trading, and every trader goes through teething pains when they started until they had some experience under their belt.

Subscriber comment: A few weeks ago I started a research project to tighten up my swing trading strategy and I read every Marder Report from January 2019 to the present. I noticed an interesting pattern. At the beginning of May 2019, end of July 2019, and early February 2020, you consistently mentioned things like lack of pattern setups, focus list drying up, extended from breakouts, etc. Each time, pullbacks followed your observations. Last week or so, I noticed this tone started to creep back into the Marder Report and I started taking profits. I entered today ~25% invested with sell stops in place that were triggered early in the morning and protected the remainder of my gains.

Normally, I get FOMO at the top, am fully invested (aka 200%), and take a painful loss on days like today. Instead, I am sitting on the sidelines with nice gains for the year eagerly ready to pounce when new setups form. For that, I thank you.

KM: Thanks for sharing this rundown. I commend you for rolling up your sleeves and putting in the time to research this and other things. As mentioned in this evening's video, it is my hope that this way of analyzing the general market bleeds over from me to you and other subscribers. After experiencing two complete bull/bear cycles with the analysis in these reports, one starts to see patterns repeat and things can be seen more clearly.

Those subscribers who came to the service in November 2018 have now seen the service cover and analyze two bear markets and one-plus-the-start-of-a-second bull market. By now, you should have a good idea of how we play offense and defense. As far as general market timing goes, I believe you are learning this from the right place. I could not have improved on when cash was raised just as the 2018 and 2020 bears began and then reentered as the 2019 and 2020 bulls commenced -- not to mention the May 2019 and August 2019 corrections, as you note.

With that said, there is no assurance that things will be timed quite like this in the future since no one knows what the future holds.

Kevin Marder

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

All stock charts created using MarketSmith unless otherwise noted. ©2020 MarketSmith, Incorporated. All other charts created using TradeStation. ©2001-2020 TradeStation Technologies. 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 no positions, though positions are subject to change at any time and without notice. Estimate data provided by FactSet. Expected earnings release dates provided by EarningsWhispers.