March 24, 2019

A rising stock index will always at some point return to its moving averages. Let's stay patient and know that the market rarely stays in one mode forever. Change is the only constant.”

The above was written in Wednesday’s report. While I was not expecting the extent of Friday’s decline, no one should have been surprised that the market came off in light of this year’s largely unidirectional strength.

In early January, I tweeted that the post-Dec. 24 market looked more like a new bull market than a rally in a bear market. Besides the behavior of the averages and leaders, I noticed that the markets were discounting the start of a new easing cycle by the Fed. This only occurs two or three times a decade, as a guess, and is almost always accompanied by a new bull market.

Since interest rates, not earnings, are the primary driver of movement in the averages, the outlook for lower rates came with one risk for stocks. And that is that the averages, which had just completed a brief bear market that discounted (priced in) an economic slowdown, might at some point begin discounting a recession.

The other risk, an economy heating up so that inflation and interest rates began rising, was unlikely because of one thing: the yield curve. The yield curve slope told me the much-greater risk was for the market to begin thinking recession.

However, this did not matter for two reasons: 1) we are traders and do not care about the news since we trade price/volume and price/volume only, and 2) key interest-sensitive groups such as the homebuilders, brokers, and banks had begun to outperform. If the market was really at risk of recession, would institutions be buying homebuilders? No.

And so the bull market took off and the rest is history. I watch the yield curve slope every day. This is the difference between yields on 2s and 10s. It is the most popular version of the curve, and is currently at 13 bps (basis points). So it is close to being totally flat. However, another definition of the yield curve slope, the 3-month to 10-year spread, is believed by the Fed to be the most accurate as an economic forecaster. It just inverted for the first time on Friday. This means the 3-month is higher than the 10-year by a few bps. This panicked some participants and sparked the Friday selloff.

A question from a subscriber:

Q: I was wondering if the Sunday Marder Report could offer some insight into the current market dynamics. Such as, what is going on with banks, inverted yield curve, 10 year treasury, general market sell off today, etc.?  Some historical context would be appreciated because it is very confusing--I assume all of these moves (stocks, bonds, yield curves, etc.) are related but I do not understand the interrelationships. What does it all mean?  Storm clouds on the horizon? Some of these charts look very bad.  Appreciate your insight.

A: I believe the above explanation should answer your questions. An inverted yield curve is when short-term rates are above long-term rates. For the most part I ignore economic indicators except for three of them (ISM survey and jobless claims are the others), and the yield curve slope is one of them. It is a forward-looking indicator, however it signals recession 12-18 months out, in most cases. Thus, it is not a timing device.

The stock market tends to discount future expectations by 6 to 12 months. No one has a crystal ball, and so it is impossible to know when the market will get into trouble. As Bill O’Neil likes to say, we are in the business of interpretation, not prediction.

You ask about interrelationships. Bond yields have been falling because the expectation is for an economic slowdown, which reduces inflation risk and makes bonds more valuable (when bond prices rise, their yields fall). Friday’s stock selloff was due to the rising expectation of an economic slowdown or possible recession, as well as the fact that bank stocks have recently been weak.

The yield curve slope has been flattening for quite a while (see chart). This reduces the profit margin for banks because banks borrow funds at the short-end of the curve and lend at the long end of the curve. If a flat curve means there is little to no difference between short and long rates, bank profit margins shrink. And if the curve inverts, lending shuts down as banks find it more profitable to simply invest in Treasury bills.


The Nasdaq lost 2.5% Friday and the S&P 1.9%. This compares with the median Watch List name which fell 4.2%. This can be expected during any market weakness. In Bill’s first book, he says that growth stocks tend to decline 1 ½ to 2 ½ times that of the major averages. In my experience, I would put it at 1 ½ to 3 times.

Overall, most Watch List names’ patterns remain intact. Some are broken and have been removed from the List. I can think of four off the top of my head that last week crossed pivot points and have been stopped out. If one is using a 6% stop on a 5% starter position en route to a 10% full-sized position, then the account loss is 0.3%. Five of these would of course be a 1.5% loss.

Regarding trade management, positions up 8% or 10% should have a stop moved to breakeven, or perhaps breakeven + 1% or +2%, which is my preference. Exiting half or all of a position at +20% is an option, rather than going for a big gain, which I define as 50-100% or more.

While Friday's market action was disappointing, the bull market is intact and many Watch List titles are in good shape. We traffic in growth stocks because we know that the market's biggest gains come from these recession-resistant vehicles. However, we must be aware that stocks fall faster than they rise, and that growth issues fall more than most. As long as we manage our risk appropriately on a per-position and total-account basis, and as long as we maintain an optimistic persona, we can take advantage of the opportunities that present themselves.

The following names are not actionable. However, they are the most constructive patterns in the current market, imo. This fact speaks volumes about the quantity and quality of pattern setups at this juncture in the bull market.

Ehealth (EHTH) shows estimates of 27%/43% for ‘19/’20. While sales grew 29% and 62% in the last two quarters, this is not a growth stock on the face of it. It is, however, a 99 RS stock with an A- rating.

This is a higher-risk issue due to its non-growth past. In any case, it needs more work before its four-week shelf can be considered attractive.

RingCentral (RNG) was on the Focus List and in the Wednesday Marder Report as buyable above the 109.84 base high. Price exceeded this in Thursday’s market rally, but returned to the base on Friday. Should price rebound and take out the 111.70 high of Thursday, it could be taken.

Wix (WIX) shows estimates of 5%/52% for ‘19/’20. Revenue increased 40% and 39% in the two recent quarters. A 93 RS stock with a B- rating.

WIX forms a four-week cup and needs more work to be considered attractive.

Workday (WDAY) is expected to show growth in earnings of 22%/33% in the January ‘20/’21 fiscal years. Sales rose 29% and 46% in the two recent quarters. A 95 RS stock with a mediocre C acc/dist rating.

This has a lack of accumulation in its three-week pattern and will need to put in more time and supply more positive technical underpinnings prior to be considered attractive.

Subscriber questions

Q: Kevin, The traditional half position entry with 3% and 2% adds is not my favorite way to enter, mostly due to the frequent pullback to the buy point once all in. I have adopted your 4 entry positions and i am much better suited to adding on pullback or above congestion. Thanks for that suggestion here.

Are you in a full position under 5%? Do you take it as it goes? In other words, an entry at the break of the high of pattern or consolidation, price goes up and pulls back to near the entry. Is that a valid add point on your pullback entry or do you like to add as price goes above 2-3%. I’ve had some that the pullback entries got me in a full position by 3% so the average cost was advantageous.

But I’m not clear yet whether that is the more risky add on since the break out has not yet proved itself. Whereas if it goes up 3% and then gives a pullback entry, more confirmation perhaps. I have ended up with several awesome winners however I did not have all the shares!

Your service is something you should be very proud of, you are just the same person and same consistent trader that I knew back in the day. I appreciate your candid conversation on the videos and I love that you still go through your charts one by one on your watch list as you taught me to do and won't do it any other way! So very glad to be in your service. Thanks so much!

A:  It is always special to hear from someone who has followed me since the ‘Nineties. Thank you for your interest in the service and these excellent questions.

No, I am not always in a full position under 5% from the pivot. If I held 10 or more positions, I might be. But I am not usually targeting 10+ issues. Since I am in fewer names, I often prefer to let a breakout’s follow-through tell me if it has the potential to be a big winner before I commit to a concentrated position.

As Bill O’Neil says, “Over time, you'll learn that only one or two out of every 10 stocks you buy will be truly outstanding and capable of doubling or tripling or more in value."

(One thing I have observed over the years – and this is important for subscribers to note – is that the first pullback following a breakout can be bought. One of Bill’s internal portfolio managers noticed the same phenomenon. This makes intuitive sense because a successful breakout will always attract interest from people who missed it and will be seeking a means of entry.

And the pullback is it, for many players. I encourage subscribers to look at some of the Watch List names to see this behavior in action.)

If I believe the potential is there for the stock to be something special after it moves up, say, 10% from entry, and I do not yet have a full position, I have no qualms about an add-on entry as price pauses to form a high handle or pullback. The negative with this is that there is not as much support in the form of a five-week-plus base to mitigate risk. The positive is that the stock has proven itself, at least at that moment, and the probability of that entry working should be in my favor.

So to sum things up, I use both the traditional half-position entry with 3% and 2% adds, as well as adding as a stock moves up. It is all contextual. For most people, I believe Bill’s idea of starting with 12%, then adding 8% and then 4% to give a 25% position is the most appropriate, but with less allocated to each position than 25%, which is aggressive.

I hope this is helpful.

There are other subscriber questions that will be answered in future Marder reports.

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.