June 7, 2020

The Nasdaq blasted to a record intraday high on record turnover Friday as market participants reacted to a much-better-than-expected jobs report. In keeping with the recent trend, the Naz lagged the S&P for the seventh time in the last nine outings.

Divergences are rarely good for the market. It is healthy to see the previously lagging value/cyclical stocks finally have their day in the sun after their thunder was stolen by the growth glamours for most of this bull market. Beginning three weeks ago, the message was that earnings growth was no longer at a premium as it had been during the bear market and for most of this bull.

Growth issues were sporting rich multiples (of earnings, i.e. price-earnings ratios). As a result, large investors, sensing what the reopening of the nation would do to earnings 6-9 months down the road, began buying the far-cheaper cyclicals.

As a result, broad cyclical sectors such as industrials, basic materials, transports, and financials have shown sharp outperformance. Among the narrower groups, it was especially positive to see interest-rate proxies such as the banks and brokers begin to outperform. These are important groups from the standpoint of overall market health.

Otherwise, most of the growth-stock glamours have already broken out and are now extended. This reduces our Focus List to two names, discussed below. I first noted the distribution in some growth-stock leaders two weeks ago in a video for premium subscribers.

These had two or three distribution days in their patterns. It would be normal for many growth titles to form flat bases following their initial breakouts from cup patterns. This would be considered a plus as it would provide us with fresh entry points. At this point, we can see which ones are holding up (the true leaders) versus which ones are showing distribution days.

In any bull market, the greatest amount of growth-stock participation, i.e. breadth within the sector -- or for that matter, the whole market -- occurs early on in a move. It is only after a move matures does one begin to see the better actors (the wheat) separate themselves from the also-rans (the chaff). Unfortunately, some of our recent triggered trades have been stop-outs amid the rotation out of growth and into value/cyclical that began May 15.

It remains to be seen how long this vogue for cheaper merchandise lasts. On the bright side, our levered ETF positions have performed well with very few stopouts.

To enlarge the following charts, please click on them.

Beyond Meat (BYND)

Freshpet (FRPT)

Paycom Software (PAYC)

In sum, growth-stock leadership peaked May 15 as market participants began rotating into value/cyclical titles amid an expectation that the economy had seen its nadir. As a result, the market is sorting out which the real leaders are within the growth sector, and which are the also-rans. This is normal, healthy, and necessary. In time, it should provide us with a series of fresh buy opportunities in the form of flat base setups.

Q&A

Q: On swing entries, if I missed the signal but price pulls back to near the entry the next day, is it triggerable? Or does that negate the signal?

A: A good question. Thank you for it. I would pass on the trade because the pattern may have changed. E.g. with NAIL, today's action put price a bit below the entry, which makes it an outside day. In this case, this does change the pattern because NAIL is now in a range. I don't want to be in a range so soon after entering a pullback trade. I exited part of my NAIL position when it undercut yesterday's low because I knew that that would make it an outside day.

We also do not know how far price is going to decline after today's outside bar. We don't have that dilemma when we are buying on firmness, not weakness. There is no firmness right now, but of course this could change in a matter of days. Bottom line: The pullback entries are for that day only, else the setup is negated

Q: You have mentioned to move the stop up to breakeven (or breakeven plus 1%) once a stock moves up 8% or higher from b/o.  If a stock advances 3-6% and then starts reversing back to breakeven or lower, do you normally give these names some room for fluctuation down to the say 6% stop loss?  SEDG and PING being a good examples today. Appreciate the insight.

A: Every situation is different, i.e. each situation is contextual. While there are no hard and fast rules on this, I would tend to leave the stop alone in your example.

Q: I of II: OKTA and DOCU had nice runs. I was stopped out on the large May 27 drop, then when both reversed higher I was thinking of getting back in, but now they are pulling back. Wondering how you play situations like this, if you're looking for potential pullback re-entry setups at this point, or just wait & see, let things settle down in case they roll over?

A: Xlnt question. Thank you for it. I think you handled those wonderfully. I would be looking for a pullback entry since these are two of the best actors, though at the moment they are not ready for that. Of course this assumes the averages maintain their firmness. When I am taken out of a position on a violation of the 20 ma, and price reverses 0-3 days thereafter so that it is once again above the 20 ma, I will sometimes be opportunistic and reenter at least part of the position.

On May 27, the fact that those issues staged Wyckoff spring-type reversals (and when open and close are very close to each other, I refer to this as a "wash and rinse" bar) would have given me more confidence to reenter. Of course, this is with the benefit of 20-20 hindsight.

Q: II of II: Thanks for that! In my case I took the DOCU and OKTA proceeds and immediately entered APPF and added to SEA and NAIL. I questioned myself when OKTA and DOCU took off again, but APPF, SE and NAIL have done well, so I took some off. I took CRWD yesterday and was stopped out this morning, which is why I'm trying to understand the action in DOCU and OKTA in case those offer a better opportunity. I haven't seen action like this since the dot com era.

A: I like the opportunism!

Kevin Marder

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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 held 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.