May 26, 2019

Shares gave ground last week as the markets discount the economic slowdown contemplated by the lack of a resolution to the U.S.-China trade war. The Nasdaq Composite surrendered 2.3% to stand 7.2% off its Apr. 29 high.

Our cautious stance over the last three weeks continues. Pattern setups are scarce for the breakout player. This is reflected in the Focus List, which contains just two actionable titles.

The major positive with this market is the ongoing relative strength shown by computer software groups, especially enterprise software. We started 2019 with nearly 50% of the names on our Watch List being software. Nearly five months later, there are 28 software issues out of 55 total on the Watch List, or just above 50%.

This is an example of how relative strength in an industry group can extend for months and even a year or longer given fertile conditions.

In a slow-growth economy with declining interest rates, growth stocks are normally favored over value/cyclical and defensive. There have been times in the past when both growth and defensive led, such as the ’89-’91 period. However, as soon as the markets sniff the possibility of recession, suddenly the lower interest rates become a negative.

We are not in that camp yet. If we were, the softwares and other growth leaders, with their rich multiples of earnings (P/E ratios) would be victims of institutional selling and rotation into defensive sectors, including utilities, staples, REITs, and telecoms, among others.

The Focus List will continually be updated with actionable ideas on the long side so that we have a game plan in front of us should the averages confirm a new uptrend. On a selective basis, we will also seek short-sale setups, especially in the inverse, leveraged ETFs which offer diversification and octane via their leverage. The challenge here is gaining entry in a market in which opening gaps have been more than normal.

Among the names, 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 May 19'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. Earnings expected June 5 (confirmed).

In sum, we were patient during the October-December bear market by protecting precious capital. Let’s adopt the same mindset here, and recognize that continuing to trade from the long side runs the risk of death by a thousand cuts.

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.