June 22, 2018

The speculative sentiment peaked early last week and led to a few days of selling, with the biggest damage occurring in tertiary names, recent new issues in particular. Proceedings had gotten frothy in titles like Scholar Rock Holdings (SRRK), Iqiyi (IQ), Dropbox (DBX), Carbon Black (CBLK), Zuora (ZUO), Huya (HUYA), Puxin (NEW), et al.

From last week’s report: “Should the market experience turbulence, the speculative glamours – recent new issues in particular – can be expected to show the most wear.”

Most speculative glamours show at least two distribution days. Friday’s action should not be accorded much attention due to Russell rebalancing its indices then. ETFs that track them must sell the names that have been deleted and buy the ones added. This creates short-lived buying and selling.

There has not been enough damage to the growth sector leadership to suggest a top in the glamours or this market has been put in. Recently, a watch list of leading issues showed about half trading within 5% of their 52-week high. After last week, this has been cut in half to about a quarter trading within 5% of their high.

Meanwhile, the backdrop includes an uncertain trade outlook, rising rates, and a weakening economy, both domestically and overseas.

Otherwise, there are very few stocks forming constructive bases. This report includes those which are believed to offer opportunity if and when the averages and growth sector firm. Some of them are flat bases in which price is inches away from taking out the lower margin of the pattern. They are included because they remain valid patterns as of the moment.

Most of these, however, do not possess the unbridled accumulation and raw relative strength of titles discussed in prior reports. This is part and parcel of the market as it stands today. It will take some time for the technical damage done to certain stocks to repair itself.

As noted on the Twitter feed, the better opportunities are expected to come from the early standouts as they form new bases, not names that have yet to come out. Many of these initial leaders, though, have hardly been nicked. It will require patience, then, for the quality setups to appear.

Among the names, Axon Enterprise (AAXN) has hearty estimates of 58%/44% for ‘18/’19. A 99 RS stock in an 88 RS group (security). The stock is 2 ½ weeks into a flat base. Thursday’s attempted breakout on -13% volume failed. This is one that is better left alone until it can put in some more time basing. It is worth watching, though, since it had a nice touch of the 20 ma which allowed it to undercut a prior low – plus its pattern appears sound, unlike so many others.

Curo Group Holdings (CURO) is in the consumer finance group, a group that is normally shunned. However, its base happens to be one of the most constructive in the current market and estimates are 35%/36% for ‘18/’19. The stock stands 77% higher than its IPO price of six months ago.

This is not the most liquid issue, with $8.2MM in average daily dollar volume and a market cap of $1.1MM. It could be taken above the base high of 24.87, which is three cents higher than Friday’s close.

Endocyte (ECYT) is going to need more time after a couple of breakout attempts were unsuccessful. It carries more risk due to it being a teen-priced name (13.79) and its liquidity of $19MM in average daily dollar volume ($25MM-$30MM in ADDV is preferred). Market cap is $958MM. Again, the pattern is fairly constructive and would become more so if more time is put in.

Evolus (EOLS) was discussed late Friday on the Twitter feed with chart here.

Loxo Oncology (LOXO) is another with a constructive chart pattern, in this case a three-week flat shelf. A 98 RS stock in a 93 RS group. This is a development stage company, so represents higher risk. Given the general market’s tone, this may be worth watching for the time being.

Paycom Software (PAYC) has estimates of 74%/23%. Revenue growth is solid. Mutual funds number 432, above the 400 level that is preferred. Price is forming a respectable head-and-shoulders continuation pattern with 17% depth, which is normal. It can be watched for its completion or a possible cheater entrance above Wednesday’s high, depending on its future price action. Friday’s +511% volume on a down day may have been related to the Russell re-balancing of its indices.

Realpage (RP) has estimates of 59%/20% and 400+ mutual funds own it. The constructive six-week flat base it is forming is on the verge of falling apart in the wake of three-straight major distribution days. Friday’s +748% volume was likely due in part to the Russell index re-balancing. Price sits on top of its last base. RP is included here in the event price recovers and halts its decline in the next few sessions.

RingCentral (RNG) is similar to Realpage in that a six-week flat base is showing signs of coming undone – but has not quite done that yet, hence the inclusion here. Worth watching.

Roku (ROKU) has been forming a large, six-month cup pattern. It is under solid accumulation. The pattern has produced three profitable pullback setups since its uptrend began and is now pulling back again. While it does not yet offer attractive entrance, it can be monitored by pullback players. Should it form a handle or other sideways congestion for at least a week, it can be considered for a breakout entrance.

Supernus Pharmaceuticals (SUPN) has estimates of 50%/37% for ‘18/’19 and large revenue growth. A 91 RS stock in a 93 RS group. Price attempted to come out of a well-formed six-week flat base on Thursday but was rejected. Volume was +131%. The pattern is still intact and can be watched for another breakout attempt above Thursday’s high of 61.10 or the 6/4 high of 58.94.

2U (TWOU) is expected to go from a 12-cent-a-share loss this year to a penny loss next year. Revenue growth in the last two quarters was 51% and 42%. Mutual funds that own the shares are 437. The six-week flat base, like RP and RNG discussed above, is under pressure after two days of selling. For the moment, it is intact and can be monitored for a possible breakout entrance above the 98.00 high of 6/4.

In sum, the market is giving participants valuable information as to which of the growth glamours are the real leaders. The latter are holding up well, seemingly oblivious to the selling that occurred elsewhere last week. Given the recent peak in the speculative sentiment, the aggressive speculator may wish to bide his time with new commitments pending the establishment of fresh entry points in established leaders.