May 22, 2019

“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.”

The above was written in Sunday’s report. Even more so than on Sunday, cash is king. With the Nasdaq being below both the 20- and 50-day lines, and with only three pattern setups available on the Focus List, the decision to protect capital via a full cash position is an easy one.

Beneath the surface of the major averages, growth-stock leadership acts relatively better than the market as a whole due to notable strength in computer software groups.

A negative is the outperformance shown by defensive sectors – consumer staples, utilities, REITs (real estate investment trusts), telecoms – for the last month-plus. This is tangible evidence of a certain risk-off mindset among market participants. Defensive outperformance is classic late-cycle bull action, and goes hand-in-hand with the rotation out of higher-risk segments like the small- and mid-caps which began in late February.

Among the names, those holding a position in DMC Global (BOOM) should consider exiting at current levels, representing a 3.7% loss if entered just above the entry pivot.

Chart: MarketSmith

The following ideas are for when the market firms up and shows better tone.

Innovative Industrial Properties (IIPR) shows earnings estimates of 108%/38% for ‘19/’20 with triple-digit revenue growth for the past half-dozen quarters. It would follow that sequential revenue growth would be high: It was 42% in the recent quarter, possibly the highest I have seen. It can be taken above the 93.24 high of its eight-week base. Earnings expected Aug. 7 (unconfirmed).

Mongodb (MDB) was discussed in Sunday’s report (“The database software expert forms an eight-week base with a 20% depth, considered normal. MDB can be taken above the 154.80 pattern high”). The comment stands. Given the soggy market environment, the 148.00 cheater entrance has been removed from the Focus List. Earnings expected June 5 (confirmed).

In sum, market tone has worsened since Sunday’s report. Traders should be in a 100% cash position unless one is holding pullback positions from Tuesday's Focus List or is sitting on substantial gains from positions taken earlier in the year, and is trying to play these out for larger moves.

Q&A

Q: Not sure if this is a question for you but thought I'd ask. I keep letting good trades pass by and end up taking the wrong trades. I had plenty of time to take the trade in GSHD on Friday and thought to myself it's too extended here after moving up from $34 to $38 so I did not take the trade. I also thought about taking a cheater entry through $36 the previous day and did not take that trade. 

Below are some more trades I did not execute and the one I did.

GSHD - did not execute through $36 or $38
SHOP - saw this trade through $254.40 and did not take it.
MDB - this was one I really wanted to take and did not execute. Saw it go through $138 and $141.50.
COUP - could have taken this trade through $105.
FTDR saw this go through $40 did not execute.

The list goes on with TWLO and ZSAnd of course the one trade I did execute which was a cheater entry in CDNA through $34.40 with a 3% stop and I ended up getting stopped out on the reversal. Any thoughts on why I seem to keep passing on the right trades and taking the wrong trades would be greatly appreciated. Thank you in advance!

A: Someone once said trading is 20% how to do it and 80% how to think. I cannot tell for certain why you are passing on certain stocks. My best guess is that you may have a fear of losing money and/or confidence by passing on the above setups. One way to deal with this is to play smaller: Try reducing your position size such that you are indifferent as to the outcome of a trade. In this market, you should be playing lighter anyway. I hope this is of some help. Thank you for your question.

Q: Hi Kevin, what is the historical precedent (if any) for growth stocks that have a secondary offering such as announced with GH and CVNA?

A: Thank you for your question. Generally, there will be a negative reaction to news of a proposed primary offering (the company issues additional shares) or secondary offering (one or more large shareholders are selling their position). A proposed offering is not telegraphed to the market with any real advance notice. As a result, the market is caught by surprise, which often provokes immediate selling of the stock by holders.

If it is a high relative-strength issue, the selling may be limited, as large investors (institutions) who are building positions use the weakness to scoop up shares and add to their holding. Other than this, I am unaware of any historical precedent, as I have not studied offerings and their effect on the market.

Mark Minervini (Market Wizard) interview with IBD

Mark buys breakouts in aggressive growth issues. Here are a few excerpts from the interview:

I’m not up at all during this most recent move up here. I had some profits and then got stopped out of a bunch of names.

“I try to get pretty concentrated. I’m trying to get as much money as I can into a small handful of names. That doesn’t mean that I necessarily go right to those big positions. My largest position is 20%-25%. In the better names, I want to have four or five of those names.     

“Back in the day when I first started doing this, I had a smaller account, and my account would be in two names, four names, full margin. Sometimes I’d even put my whole account in one name, which of course I wouldn’t recommend. On average I’m only in the market about 50% of the time and about 50% invested. That’s on average.”

Kevin Marder

For intraday ideas and analysis: https://twitter.com/mardermarket

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.