Part II of this report will consist of a video discussing some of the more attractive growth names. A notification email will be sent accordingly with a link to the video.
Stocks experienced a selling climax Thursday en route to printing a new low in this three-week bear market. On an intraday basis, the Nasdaq Composite is off 26.9% while the S&P 500 is down 27.0%.
A selling climax results in a vacuum of sellers which in most cases then allows price to rally quickly. This time around, late in Friday's session the Nasdaq soared 7.2% in just 25 minutes. The explosive rally occurred at the same time that the president declared a national emergency which freed up $50B in funds. The significance of a selling climax is that it usually produces a short-term low from which a sold-out market can rally.
What it does not tell us is whether that short-term low will prove to be a durable bottom of intermediate- or long-term proportions.
Meanwhile, today the Federal Reserve cut its key policy lever, the overnight fed funds rate, 100 basis points to between 0% and 0.25%. While not unprecedented, such a large move underscores the seriousness with which the Fed is taking the coronavirus threat. Among other measures, the Fed also announced QE5, another round of so-called quantitative easing, whereby it seeks to keep interest rates low by purchasing Treasury and mortgage-backed bonds.
The market was said to be wanting more than the Fed offered, specifically a boost to the commercial paper market. The absence of this resulted in Sunday evening Nasdaq futures dropping 4.6% to trip a circuit breaker that halts trading until Monday morning. Talk circulated that the Fed might add a commercial paper market facility before day's end.
Otherwise, we are not operating on any assumptions regarding whether Thursday's selling climax will produce a short-term rally. The focus is on those growth stocks that have shown special resilience during this bear market. This is evident by upward-sloping RS (relative strength) lines. It is also beneficial for a stock's price to be above the 50-day moving average line. Of the 47 names on our Watch List, 13 or 14 are above their 50-day lines.
A positive is the growth sector, which continues to curry favor with institutional investors on a relative basis. This is logical, as growth issues, with their recession-resistant qualities, would provide investors with the earnings growth that can be elusive in an economic slowdown. Thus, large investors would be willing to pay the higher earnings multiples (price-earnings ratios) that growth titles normally command. This is the way things normally work when the market comes out of a bear phase.
With historically high volatility and sizable opening price gaps, it has not been advisable to hold a stock overnight. This has sidelined our swing trader opportunities, particularly the inverse index ETFs.
In sum, cash is king. The game plan will be to await the settling down of the market's volatile nature in order to pursue selected short and inverse ETF ideas.
Q: Good morning, Kevin. Had a question about the Nasdaq RS line which I found your reference to it incredibly interesting. I know and appreciate your emphasis on the vital importance of a stock’s RS line but don’t know how a RS is calculated for an index. Relative to what? If appropriate could you send me a link or reference a resource or briefly address in your report? Continue to enjoy and benefit from your service. As always, thanks to you.
A: You are welcome. Most of the time, the RS comparison is to the S&P. So the equation is Nasdaq price close divided by S&P price close. That calculation is done each day for a stock and a line can then be drawn connecting the data points. One could also measure the RS of a group’s components to the group in order to see which stocks are stronger within the group. So each semiconductor stock would then be compared to the SMH (semi group ETF). You then compare each stock’s RS line to the others. I hope this is clear.
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Individual stock charts created using MarketSmith. ©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.