May 3, 2020

Stocks pulled back Friday as the president threatened China with tariffs as a means of retaliation for allegedly introducing the coronavirus to U.S. shores. This was the excuse that some market participants may have been looking for to take profits amid the six-week advance.

While the Nasdaq Composite lost 3.2%, our median Watch List stock gave back 1.9%.

It is important to realize that only a few names exhibit an outsized effect on the Nasdaq Composite average. Specifically, the FAAMG stocks (FB, AAPL, AMZN, MSFT, GOOG) comprise 46% of the Nasdaq 100 which itself comprises over 90% of the Composite. Thus, over 41% of the Composite is comprised of five issues.

After our two general market indicators -- the averages and the leaders -- the two secondary indicators that qualify as longer-term signposts are breadth and the financials. Breadth has not been a problem for a number of years. (This public blog post shows one measure of breadth and how it has been a leading indicator of market direction, albeit with a lag.)

Another breadth measure was illustrated by Goldman Sachs in a recent report. They note that year-to-date, the five biggest stocks (FAAMG) are up 10% while the remaining 495 S&P 500 companies are lower by a collective 13%. 

Breadth is not something that tells us when to enter or exit the market. Only the averages and leading stocks do. But it is something that can be followed for more granularity as to market health.

Otherwise, it is a fact of trading that breakouts which occur right before a pullback in the averages will often be stop-outs before they can reach the 8% threshold that would allow for moving a stop up to breakeven. Friday's pullback saw this occur in ARVN, CCC, and ZLAB. TDOC also returned to its entry point, but its 14% MFE allowed a stop to be moved to a profit before Friday's retreat in prices.

A number of Watch List names which did not make it to the Focus List as buys also dropped well below their entry pivots, including MSCI and SWCH.

Our TQQQ trade took an MFE of 10.7% before reversing to stop out at breakeven plus a small profit.

At present, there are only a few pattern setups which are discussed below. The following charts can be expanded by clicking on them.

Atricure (ATRC)

Chipotle Mexican Grill (CMG)

Insulet (PODD)

Paypal (PYPL)

Servicenow (NOW)

In sum, despite the averages being in a pronounced uptrend, few pattern setups present themselves at present.

Q&A

Q I have two questions; the first is the health and condition of the current bull trend.  Regarding my own style of trade, I have accepted that I am not much of a position trader, as I can't seem to be able to latch on to and hold those "Really Big Winning Stocks" that O'Neil followers seem to gravitate to.  I would love to pick the next Cisco, Apple, or Amazon and ride it for months to triple (and even thousand) percent gains, but I am most comfortable hitting doubles, during the four or five times a year that the window of opportunity truly opens up and then sitting in cash for the remainder of the time.  This has me investing (speculating is a better term) furiously for about four to seven weeks, with a hold time somewhere between three and ten days per position.  I typically scale out into strength; then as the market breadth thins and corrects below the 20MA of the averages, I sit in cash and wait.  I went through several boom-bust cycles before I realized why my gains were frittered away because I wasn't sidestepping those 8-12 percent declines in the averages.

One technique that I have found, that helps to determine whether the window of opportunity is closing, is the breadth of my own watchlist (a trick I have learned from you - thank you).  When nothing is setting up, a correction is usually imminent.

That brings me to my question about the current state of the market.  My watch list is not giving me a whole lot right now.  Sometimes I do a very wide screen of the market to see what industries and sectors (outside of growth) may be popping.  Right now I see a lot of boring crap popping up, for lack of a better term.  It isn't enticing but if I want to lower my standards and trade on technicals and themes alone, maybe I can hit some singles.  I did do something uncharacteristic and took some ETF positions (NAIL, for one thank you - one good day was enough to juice my account).

Last summer, for a brief time, you had provided short-term swing trades to your subscribers, as there was nothing attractive in the growth sector, making it clear that cash was the place to be at that time.  I wonder if we are approaching that sort of period?

Maybe I have answered my own question, insofar as I see the value of reading the charts in my own watchlist, but I wonder if you can comment on the current health of the market and the opportunities that may be present to speculators that keep an open mind (you have mentioned a comparison to the early 2000's bull market).

Thanking you again for the service and the attention that you have paid to subscribers individual questions.  I really appreciate the service, not only for the actionable insights regarding positioning for a pending bull or bear move and individual stock selections, but also for the first-rate education that you provide to abecedarian speculators.

I do really appreciate the time that you take to answer my questions, you have always shown sincere concern and offered your patience. Your advice has been generous and prudent and continues to serve me well.  Thank you.

A: Thank you for taking the time to explain your situation and offer feedback. For position trading, your money management is sub-optimal, in my opinion. It appears your use of concentrated position sizing, possibly with margin, has your account suffering intolerable equity drawdowns when the averages pull back for a few days. This forces you to exit positions prematurely, at least if you are a position trader, before the stocks recover and move forward again.

The good news is that, while you may not be wired for position trading, your unique makeup may be best-suited for short-term trading by flipping breakouts as you are currently doing.

Regarding the short-term trading ideas, when there is a good amount of breakout candidates, I do not look for swing trader entries. I did begin looking for System R signals late last week but to no avail. This will continue. My focus has been on beta testing a swing model for possible introduction to the service. The model is one I have had for about nine years, but never traded.

Kevin Marder

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

All stock charts created using MarketSmith unless otherwise noted. ©2020 MarketSmith, Incorporated. All other charts created using TradeStation. ©2001-2020 TradeStation Technologies. 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 FactSet. Expected earnings release dates provided by EarningsWhispers.