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The big picture is that of a market busily discounting an economic slowdown in ‘19. This occurs as earnings growth appears to be peaking, the housing market has already peaked, and trade tariffs have begun to bite at corporate profits.
Historical precedent shows that the health of today’s economy is not a good indication of how far a bull market in stocks has to run. Specifically, as noted in the Twitter feed on Oct. 28, “The nine recessions since 1956 began a median of eight months after a primary S&P top.”
The market, in its inimitable wisdom, simply sees better than we mere mortals do.
The primary technical negative is the negative divergence that began Sept. 20 when the S&P printed a new high that was not confirmed by a new high in the NYSE a-d line. This is of note because most bulls end after a breadth divergence has been in place for a while, three to four months at least.
A short historical study of the last five primary bull tops, all preceded by negative breadth divergences, is available here. It shows a median lead time of four months between the onset of a divergence and a primary top in the S&P.
One could say that since the divergence began six weeks ago, the S&P has another 2.5 months until the four-month median is reached. But it usually does not pay to be “cute” with the market, including micro-analyzing it like this.
What makes more sense to determine market health is to see whether breadth lags on the next rally in the averages. Volume and leadership on this next leg up will also prove pivotal.
In the meantime, one of two things may transpire. Either an O'Neil follow-through day (FTD) will occur or the averages will test the Oct. 29 lows. If the latter, a successful test will have price fall to the general vicinity of the Oct. 29 low. To be successful, this test should come on reduced volume than what occurred on and just prior to the Oct. 29 lows, print fewer 52-week lows, and better-acting names should continue in stout fashion. It is possible a test includes an FTD and a successful test of the Oct. 29 lows.
Along these lines, premium subscribers should be on the lookout for a members-only, blog post email notification should any of these things materialize on a day other than the normal Wednesday Marder report day.
The following issues of interest are discussed in the event of an FTD or other turn up in the averages. They also may be of interest to very aggressive players who may wish to take one or more test or pilot buys. Otherwise, a full cash position is warranted for the long-only position trader.
Among the names, Attunity (ATTU) is forecast by the Street to post a 2% decline in earnings in ’19, though revenue has been solid at 35% in the recent quarter. A 99 RS stock.
Technically, two things stand out. This name more than tripled from April to August. This type of raw strength in such a compressed timeframe often begets additional strength. The resulting 35% correction is not viewed as excessive when taken in context of the previous advance.
As well, issues that form the right side of their base in less time than they took to build the left side are preferable. ATTU took just three days to move up 36% from near the base low to near the base high. This earnings-related spike came on heavy volume. The stock should be allowed to digest this gain and can be monitored to see if it forms a handle or pulls back. ATTU does not present an attractive entrance at this juncture.
Caredx (CDNA) was one of perhaps two titles I was targeting for a possible pullback buy just before the market topped in early October. Interestingly, it came back on the watch list thanks to its relative strength shown in the last three weeks.
Earnings are expected to jump from a 22-cent-a-share loss this year to a 10-cent profit in ’19. Revenue swelled a hefty 48% in the recent quarter. A 99 RS stock in a 96 RS group, medical products.
It forms a five-week base with a 28% depth, considered reasonable in light of the 85% jump in seven weeks it had previously made. CDNA could be taken above the 29.60 base top on confirming volume, though earnings are expected out on Nov. 8 after the close.
Freshpet (FRPT) is expected by Wall Street analysts to post a five-cent-a-share loss this year, but a 29-cent profit in ’19. Revenue grew 23% in the recent quarter. This is a 99 RS stock in an 86 RS group, packaged foods. This is a recession-resistant group usually popular during defensive-oriented market phases which is what we are currently in. This may explain it and FRPT’s strength. Unlike most food shares, this one is a growth stock.
FRPT has been a big winner, moving from 8 to 40 over less than two years. During the current market weakness, it has shown relative strength as it came out of a five-week flat base. Volume was soft on the breakout day and price began forming an ascending base over the past two weeks.
Ascending bases are often found in a market leader that is resisting the downward pull of a bear market or intermediate correction. This is worth keeping an eye on to gauge its action following its earnings report, expected on Nov. 5 after the close.
Goosehead Insurance (GSHD) is a recent new issue, coming out at 10 in April and moving up 187% in its first eight weeks. Most analysts eye 76% earnings growth in ’19 for this 99 RS issue. Revenue climbed 36% in the recent quarter.
This is a less-liquid name. Despite a $1.3B market cap, its ADDV (average daily dollar volume) is only $4.7MM. (Normally, at least a $25MM-$35MM ADDV is desired.)
Price forms a seven-week cup and does not offer attractive entrance. A handle or pullback can be watched for. In the meantime, earnings are expected Nov. 5 after the close.
Guardant Health (GH) has been one of the best-performing recent new issues, coming public at 19 on Oct. 4, and reaching a high of 44 in its first two weeks. This initial strength, well exceeding the 50% gain in the first two months that is preferable to see from a recent new issue, is one part of the thesis.
The other part is that a new issue, considered among the most speculative of stocks, could do this during a broad risk-off correction. This speaks loudly.
GH is two weeks into a consolidation and does not yet represent attractive entrance. Its earnings are expected soon, but there is no date available, which makes this a wild card. Very aggressive players who target recent new issues should keep an eye on this, as it might be considered among the cream of the new crop.
Healthequity (HQY) should show 25% earnings growth in the January ’20 fiscal year, per most analysts. Revenue has been steady, and was 25% in the recent quarter. A 97 RS stock.
Price works on a seven-week, double-bottom base with price gapping to a 5% win on +82% volume the day HQY crossed the pattern’s midpoint. This is viewed as a positive omen. As well, price appears to be forming the right side of the pattern in less time than its left side, another plus. The stock can be taken above the 99.99 high of Sept. 14.
Mellanox Technologies (MLNX) forms the right side of its base in a hurry, up 35% in just the last seven outings. This is a 95 RS stock in a cyclical group, the semiconductors. The Street predicts 22% earnings growth in ’19, and sales expanded by 24% in the recent quarter.
While MLNX is far from a growth stock, it has nonetheless shown remarkable power in forming the right side of its four-month consolidation. A week ago, price jumped 10% on +314% volume and another 14% on +616% volume the following day. This was earnings related.
MLNX does not offer attractive entrance at present, but should be monitored for any hesitation in the next few sessions. This could take the form of a pullback or handle in light of price being just 2% from its base-top pivot of 90.45.
Mongodb (MDB) has been discussed a number of times, with emphasis placed on the high price persistency shown during its Q2 and Q3 runs. This 99 RS stock shows losses expected in ’19 and ’20, but revenue accelerated 61% in the recent quarter.
Its RS line also hit a new high earlier this week ahead of price, which is forming a seven-week base. MDB offers an 85.25 entrance pivot for a breakout play.
Staar Surgical (STAA) was a big winner, tripling from May into September. After booking a penny-a-share profit in ’17, most on the Street expect two cents this year and a leap to 25 cents in ’19. Sales grew 35% in the recent quarter. A 99 RS stock in a 96 RS group.
The stock was a market performer during most of the pullback in the averages. However, it has outperformed in the last week to sit just below its 50 ma after rising 6% on +179% volume due to its earnings report. This is a name to monitor on a watch list to see if it can continue its nascent move up the right side of its base.
Teladoc Health (TDOC) has outperformed since a week into the market sell-off. While losses are expected this year and next, revenue growth has been at least 60% for each of the last eight quarters. A 98 RS stock.
After its earnings report late this past week, the stock may need some time to settle down. It is then that its true colors may be revealed. TDOC can be watched to see if it can continue its newfound progression up the right side of its double-bottom pattern.
In sum, the health of the next leg up in the averages will tell the real story about market health, and whether this is just an intermediate-term correction. Breadth, volume, and leadership will be vital. The challenge for less experienced, newer participants is to ignore the news media and focus on what the market is actually doing.
This has always been, and remains, the best course of action.
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Unless otherwise noted, charts created using TradeStation. ©TradeStation Technologies, 2001-2018. 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.