Stocks are in short- and intermediate-term downtrends, notwithstanding two days of rally. The market is very news-driven, as every comment by the president or Mnuchin on the status of U.S.-China trade talks turns the averages sharply.
While the Nasdaq Composite was up 1.13% Wednesday, one can chalk that up to strength in large technology issues, and not small and mid-sized issues, which each gained just 0.33%. Meanwhile, the S&P was up just 0.58%. Thus, the rally was uneven, which is why the health of a market is best revealed on the rally following a decline, not a rally into new highs.
It is the rally following a decline that possible divergences make themselves apparent. There were no real divergences headed into the recent highs in the averages, but this is something to be followed in coming weeks for a longer-term signpost as to market direction and health.
In the meantime, we should continue to respect the downtrend and take fresh-money buys with less aggressiveness than earlier in the year. I remain in cash and have not taken the pilot buy that I referred to in a video of earlier this week. The names below are for those interested in having some long exposure, either today or if the averages show some strength in coming sessions.
Caredx (CDNA) shows a big jump in earnings per share, from 8 cents to 59 cents, or a 638% increase, for ’20. Revenue is quite hefty at 88% and 85% in the last two quarters. A 99 RS stock in a 72 RS group with a B- acc/dist rating.
Price traces a symmetrical seven-week cup pattern with a 35% depth. The latter is considered normal. More-aggressive players can take the cheater entrance of 34.40, which is roughly 15% off its all-time high. Earnings expected Aug. 7 (unconfirmed by EarningsWhispers).
DMC Global (BOOM) is a growth stock in a cyclical industry group, metal processing and fabrication. Earnings estimates are for growth of 78%/15%. Sales increased by 66% and 49% in the two recent quarters. A 99 RS stock in a 66 RS group with a B+ acc/dist rating.
BOOM was mentioned in Tuesday’s video and Focus List as buyable above 71.38. Wednesday it cleared this level, up 3.8% on +32% volume. Since price is less than 1% above the pivot, it remains buyable, and can be taken above Wednesday’s high of 72.34. Earnings expected July 25 (unconfirmed).
Goosehead Insurance (GSHD) is forecast by the Street to log 60% earnings growth in ’20. Revenue rose 32% and 59% in the two recent quarters. A 97 RS rank in a 61 RS group with a B+ acc/dist rating.
This unusual growth-stock-in-a-cyclical-group forms an eight-month consolidation. Longer bases tend to produce bigger post-breakout moves, all else equal. The stock can be taken above the 38.18 pattern high. Earnings expected Aug. 1 (unconfirmed).
Impinj (PI) was discussed in Sunday’s report (“Price forms a seven-day, high-tight-flag. It can be taken above 30.00”). The comment stands. The thesis centers on the stock soaring 35% on earnings two weeks ago with volume coming in at +1,000% -- and then correcting all of 14% during the formation of this pennant pattern. Earnings expected July 29 (unconfirmed).
Innovative Industrial Properties (IIPR) is predicted by most analysts to notch earnings growth of 108%/38% for ‘19/’20. Revenue grew 110% and 147% in the two recent quarters. A 99 RS stock in a 73 RS group with a B- acc/dist rating.
An aggressive operator can take IIPR above the cheater entrance of 87.99, while less-aggressive speculators can wait until the 93.24 pattern high is breached. Earnings expected Aug. 7 (unconfirmed).
Mongodb (MDB) shows losses for the January ‘20/’21 fiscal years. Revenue surged 67% and 71% in the two recent quarters. A 99 RS stock in a 91 RS group.
The database software expert forms a seven-week base with a 20% depth, considered normal. MDB can be taken above the 154.80 pattern high. In the meantime, a possible cheater entrance may present itself, which I am on the lookout for. Earnings expected June 12 (unconfirmed).
Splunk (SPLK) shows earnings estimates of 26%/34% for the January ‘20/’21 fiscal years. Sales have risen 40% and 35% in the two recent quarters. A 91 RS stock in a 91 RS group with D+ acc/dist rating.
I would not fret over the acc/dist rating, which will naturally fall off when a stock goes through a basing process. What is most important is how price acts as it crosses the pivot point and immediately thereafter.
This contains a bit more risk than usual due to the bouncy nature of the base. It can be taken above the 140.75 swing high of 2+ weeks ago. Earnings expected May 23 (confirmed).
Twilio (TWLO) is indicated to post earnings growth of 9%/142% for ‘19/’20. Revenue growth sizzles, and was 77% and 81% in the two recent quarters. A 98 RS stock in a 99 RS group with a B- acc/dist rating.
The stock can be taken above Friday’s swing high of 136.34. Earnings expected July 30 (unconfirmed).
In sum, speculators should wait to see more technical evidence before diving into fresh-money buys. A pilot buy or two makes the most sense in such a news-driven market. With that said, market pullbacks often offer a slingshot or catapult effect in some of the leaders as they snap back from days of decline.
Q: Should we be looking for stocks with forward P/Es greater than current P/Es or vise versa and why?
A: Based on some of the questions you have asked recently, it appears you are combining a technical approach to position trading with valuation and other non-technical items. I have not found that to work, mainly because, in the exit decision, the non-technical factors can interfere with what the technicals are saying. If that works for you, then that is what counts.
I do not look at p/e ratios except every once in a while, when I compare forward p/e to its expected earnings growth for the next year. This is the PEG ratio, or price to earnings growth. The best performers often have PEGs of between 1:1 and 2:1. However, I never allow this to be part of the investment decision. Supply/demand is, in my view, the most efficient and effective means of position trading.
As I have mentioned, I only look at three things when I size up a stock: expected earnings growth, relative strength line, and technical chart pattern. Recent sales growth might be considered item 1A, as it is related to earnings.
In this day and age where we are inundated with information of all kinds, the challenge is not to find more info but to only use what is necessary. This is one reason I never watch financial television or pay attention to sentiment indicators: They add nothing.
Q: Hi Kevin, continue to love the service, especially the videos. Do you think BYND is a valid IPO U-turn? Blessings.
A: Thank you for the sentiments. Yes, BYND is an IPO base, or what I used to call a “give and go” pattern back in the days before O'Neil labeled it an IPO U-turn base. However, it is up 51% from its low of last Friday. Therefore, it has come up too far, too fast for even the most aggressive of operators to consider entry. Note the two days (Friday and Monday) of ridiculously low volume.
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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.