May 20, 2018

Stocks give a good account of themselves overall as participants contend with a rising-rate environment. Leadership has been very good, with volume the obvious sore spot in the averages, especially New York Stock Exchange volume. Nasdaq activity has been better, but even this leaves something to be desired given the existence of just one major accumulation day since the April lows; ditto for the S&P.


For now, leadership has made up for this apparent lack of conviction. Numerous speculative growth stock glamours have broken out of well-formed bases on volume. Some of these have pulled back shortly after launch, which is not unusual. This has provided an additional entry point for add-on positions for pullback players.

Beyond the slackness in volume at the surface of the averages, liquid glamours like and Netflix have been resting while they add to the attractiveness of their bases. It is to be noted that, in general, most congestion areas, i.e. bases, tend to resolve themselves higher, not lower. Thus, these titles should be viewed positively and monitored closely for breaks up and out of their patterns.

That growth stocks have handled themselves so well amid a backdrop of rising interest rates, a backdrop that is normally anathema to them, speaks. The fact of the matter is that no one knows at what level rates will have to reach in order to permanently stunt this bull market. People can guess at 3% or 4% as being the magic level, but these are merely guesses.
Instead of relying upon prediction or personal opinion, it is always better to let the market tell its own story.

Among the names, Alibaba Group (BABA) is a rare bird, growing earnings at a fast, yet stable pace while boasting a ridiculous amount of liquidity. The Chinese version of is expected to punch out earnings growth of 28%/34% in its March ‘19/’20 fiscal years. Revenue has grown by 66% and 76% in the last two quarters.
Price is 5% from the top of a three-month pattern and can be taken on a cheater entry above 201.50 or a standard entry above the base top of 206.20. (AMZN) reacted well to its earnings report of three weeks ago. The stock is buyable above the 1638.10 high of its breakout attempt three weeks ago. In light of the market’s dim volume, this entry type is preferred over a pullback entry.

Netflix (NFLX), like AMZN, is best taken above the high of its pattern at 338.82 as opposed to above the seven-day ledge it is forming. Again, this is a function of the market’s slack volume. The belief is that a formal breakout would put the stock on the spot and better show its true health via a volume test. Either NFLX is the dynamic leader that it has been or a stock that needs more time to rest.

Neurocrine Biosciences (NBIX), after five years of losses, is expected to lose 23 cents a share this year but earn $1.55 a share in profit next year. Price forms a nine-week cup that is punctuated by two major accumulation days and one major distribution day. NBIX poked its head above the 92.98 base top last week on mediocre activity while going out Friday just 27 cents above it.

Should price back and fill for a few more sessions, a breakout entry could be taken above the 94.48 high of 5/17. A more-aggressive player would simply buy the breakout without waiting for any more sideways action to be formed.

PTC Therapeutics (PTCT) is a biotech concern that is expected to turn a profit for the first time in eight years in 2019. Revenue growth has been strong. Technically, price has been forming an eight-week cup-with-handle base. Friday, it attempted to clear its handle but was turned back on average volume.

As with a few other names discussed here, rather than enter the stock right here (1% below its handle top), it would be preferable to wait until the formal base breakout above 33.22, the Mar. 21 high.

Servicenow (NOW) has acted well while rallying about 14% since its earnings report. Earnings are forecast to grow 74%/36% for ‘18/’19 and revenue has grown in recent quarters by a consistent 37%-42%. NOW is in the 99 RS enterprise software group.

A positive about this stock is its smooth RS line and price action generally. Not coincidentally, the number of mutual funds grew from 1028 to 1152 over the past nine months. A pullback entry could be taken above Friday’s high of 174.56. Using the 5/15 swing low of 168.79 as a stop area would equate to 3% risk, or de facto risk of under 2% if using a half-sized starter position.
With that said, given that price did not respect the support area formed by the top of its base, a better entry may lie above the 182.59 high of 5/10. This would be 3.4% above the base top.

Shopify (SHOP) is in the sweet spot of mutual fund sponsorship numbers, with funds growing from 459 to 588 over the past few quarters. After an expected dip in net from last year’s 16 cents a share to this year’s 15 cents, next year should be 58 cents, per Wall Street. Revenue growth has been bulky, ranging from 68% to 75% over the past few quarters.
Price is forming a seven-week cup and, with earnings not expected until 7/30, can be taken above the base top 5% away at 154.82. An alternative entry that is every bit as valid would be above the handle being formed.

Square (SQ) has fat earnings estimates of 70%/67% for ‘18/’19 and revenue growth of 36% and 45% in recent quarters. Price is forming an eight-week, double-bottom base. SQ can be taken above the 58.46 base top. The stock should also be monitored for sideways action that might form more of a handle at a more advantageous price.

TAL Education Group (TAL) is a Chinese provider of after-school services to students. Earnings are forecast to grow 12%/65% in the February ‘19/’20 fiscal years. Revenue growth has been 66% and 59% in recent quarters. Mutual fund sponsorship sat at 617 funds on Mar. 31. This is in what is believed to be the 400-1100 sweet spot for funds.

The stock is under solid accumulation as it builds an eight-week, base-on-base pattern. Friday it came out of a five-day handle but was turned back intraday. Volume was -6%, or 6% less than its 50-day average of volume.

TAL can be taken above the Friday high of 42.50, which would be 1.8% beyond the base top, and thus would not be extended. (WIX) has a lot to look forward to, per Wall Street. Whereas the Web development platform provider lost a penny a share last year, this year it is forecast to earn 64 cents a share with another $1.27 slated for next year. Revenue has grown 41% and 49% in the two most recent quarters, respectively.

A plus is that WIX has been basing for more than a year following its fourfold move previously. It can be taken above the 4/18 high of its current base at 89.95.

In sum, growth sector leadership given the maturity of this bull market and its rising-rate backdrop is a distinct positive. Breakouts occur on volume with fairly few failures. At the same time, participants should be aware that the overall lack of NYSE volume will, if not cured, eventually pose a problem for the averages.