March 29, 2020

Stocks continue to discount the economy of the next six or so months into current prices. To its credit, the Nasdaq Composite managed to stay above its recent trading range and currently sits a few percent below its 20-day line. The short-term trend is neutral as there is a lower low and a higher high.

For those who follow the O'Neil follow-through day concept (FTD), the view here is that Day 0 was on Monday. This was when the Nasdaq recorded its lowest close, and is the way FTD rules are outlined in Bill's first book, first edition. Thus, Friday was Day 4 and the first day in which an FTD was possible.

It is important to remember that the success rate of an FTD is less in a bear than in a bull market correction. Still, it is always a positive when one shows up.

As previously noted, during a bear market, stocks most often bottom when the backdrop is bleak. Technically, this occurs when everyone who wanted to sell has already sold. The exact timing of this is not known until after the fact, and usually well after the fact.

We can be aware of the statistics such as the one about the largest rallies occurring in bear markets, not bulls. However, for our money there is nothing that can improve upon a day-to-day understanding of the price/volume behavior of the averages and the action of leading stocks.

What can we expect?

The historical precedents that are worth noting include the crashes of '87 (Dow -22.8% in a day), '08 (S&P down about one-third in 15 sessions), May '10 (the so-called Flash Crash), and August '11 (the downgrade of the U.S. credit rating).

The chart below shows the latter and its waterfall decline which was part of a 20.3% Nasdaq bear market. The key point worth noting is the initial test followed by a series of wide swings. These swings lasted for about four months before the index took off in earnest. Interestingly, the May '10 waterfall also saw swings for the same period -- four months -- before it took off.

In terms of broad sector leadership, large-cap growth remains in the lead which is obviously a plus for our style of investing. Drilling down into narrow industry groups, biotech and enterprise software groups both hold 98th percentile RS ranks from O'Neil.

During a bear market, it is of the utmost importance that subscribers maintain an understanding of which might be the most attractive issues if the general market was to flash an FTD or otherwise show firmness. I made this mistake in '90, my first year with the strategy. Once a bear market began in July, I completely stopped looking at charts. The bear ended in October of that year. Had I been keeping up with my research during the bear, I would have noticed some names resisting the downward pull and could have gotten into them before I eventually did. Fortunately, I learned a lesson and never made that mistake again.

We can expect some of the Watch List names to take off at the first or one of the first signs of strength in the averages. O'Neil has always counseled that when an FTD arrives, one should always try to buy at least something on that day. This does not mean to all of a sudden become aggressive, but to instead treat a first purchase as a pilot buy. This means using a measured position and waiting for it to show upward progress before adding to it or establishing another position.

In sum, cash is king. It is important to note that a bear market spells o-p-p-o-r-t-u-n-i-t-y. This is when fresh bases are formed, which sow the seeds of future breakouts. It is a time to keep our heads up, maintain an optimistic attitude, and be alert to any changes in market character.

Part II of this report will consist of a video containing a comprehensive Watch List review of all 35 names. You will receive a notification email when this has been posted.

Kevin Marder

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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.