Given that there have been just three-and-a-half hours of market activity since our last report of Wednesday, there is nothing new to say about the general market.
To review, since early October the market has been pressured by a belief that the economy and earnings have peaked for the cycle. The villain here is higher interest rates and, secondarily, the trade war with China.
It usually does not take this long for a higher-rate regime to fell equities, but this time was different since rates were starting from such a low base. The overnight rate controlled by the Fed, for example, began rising from a level just above zero.
Among the three large stock types – growth, value/cyclical, and defensive – it is growth that is by far the most sensitive to changes in rates. For this reason, growth tends to peak before the other two during a bull market. This is what we have seen.
Conversely, growth normally leads everything else during the early portion of a new bull market. (There are exceptions, such as the bull that began in late ’02, which for the first six months was led by non-growth groups.)
This makes it all the more interesting to note that the bond market recently concluded the Fed will not raise rates as aggressively in ’19 as the central bank has indicated. The yield on the 10-year Treasury has fallen from a 3.25% high on Oct. 5 to the current 3.05%.
Equally, if not more, important, the market has lowered its expectations to 1.5 Fed rate hikes in ’19 vs. the Fed's guidance of three hikes in '19. The market has now pushed forward its belief of when rates will peak to early ’20.
While that may seem like a long time, it is to be remembered that the market is a discounting mechanism. This means it factors future expectations into current prices. Thus, if the market believes rates will peak in early ’20, it is possible to see stocks react in a good way some months beforehand.
While none of this concerns us as technical traders, and the above could change a day, a week, or a month from now, it might provide clarity on my own expectations. Of course, these expectations have nothing to do with carrying out a successful plan of speculation.
The keys to successful speculation are 1) the discipline to only take setups that adhere to one’s plan, 2) the patience to wait for them, and 3) the flexibility to change one’s course when conditions warrant.
Otherwise, a subscriber wrote in to say he was nervous because he still holds stock and he is afraid we may be in a bear market. He said he did not catch my Oct. 4 tweet saying that I went to cash just before the Oct. 2 close.
The Marder Report operates under an SEC publisher’s exemption that removes the need to be a registered advisor with the proviso that one not issue individualized investment advice away from the Web site. Thus, I cannot advise our subscriber on what he should do with his long holdings.
For those Twitter followers, you might recall my mentioning a piece of O’Neil research indicating the average big-winning stock in one bull market corrects 73% during the ensuing bear. And most big winners from one bull do not repeat as big winners in the next bull.
There are definitely some exceptions. The first that comes to mind is Amazon.com (AMZN) which was first a big winner in the Bubble Era of the ‘Nineties.
Meanwhile, in light of the poor general market environment, the following names are mentioned in the event of firming in the averages and some evidence the speculative sentiment has returned. Until then, they are not meant to be taken should they break out.
Among the names, Amedisys (AMED) provides home nursing services. Earnings growth is expected to taper to 12% in ’19 from 62% this year. Revenue growth was a tepid 12% in the recent quarter. A 98 RS stock in a 97 RS group.
The stock forms an eight-week cup-with-handle. Its 24% depth is reasonable considering the prior upmove saw price more than double from its prior base. The RS line is already in new-high ground ahead of price, a plus.
The minuses here are the 12% estimate for ’19 and the luke-warm 12% revenue growth. AMED’s double earlier this year was likely the market’s discounting (pricing in) the expected 62% earnings growth in ’18. But what is left for ’19? Twelve percent, per most Street analysts. Is this enough to make AMED a market leader?
It is doubtful, though price has the final say. The stock’s base appears sound, and this, as well as its high RS, is grounds for inclusion on the watch list. Due to the pronounced downtrend in the averages, it is preferable to ignore a base breakout and see if the market allows it some follow-through. If so, a pullback entry can be contemplated.
Codexis (CDXS) is a biotech with losses expected this year and next. It is also a thinly-traded issue, with ADDV (average daily dollar volume) at $7.0MM. Revenue growth, however, was 31%/70% in the recent two quarters. A 99 RS stock whose RS line just went into new-high ground ahead of price.
This is one of the best bases in the market. Price is about 8% from the pivot at the base high. Like the other names on this list, this is not something that can be bought until the market shows it favors breakouts.
Euronet Worldwide (EEFT) is a credit card processor with estimates of 20%/25% for ‘18/’19. A 95 RS rank stock. Earnings stability is extremely high (standard deviation is 4%; anything below 15% is considered excellent) which accounts for its popularity in a defensive market environment that rewards consistency.
Nearly two months ago, the stock vaulted 15% on +353% volume. This type of move has our attention. Since then, price has been consolidating its gain. This is a candidate for a breakout play should the market begin rewarding such setups. For now, it is worth monitoring.
Canada Goose Holdings (GOOS) is a Canadian apparel maker and retailer. Estimates show 12%/28% in the March ‘19/’20 fiscal years. Revenue grew 34% in the recent quarter. A 99 RS stock.
Last week, the stock’s breakout failed as price returned to inside its five-month base. This is one worth watching for signs that the speculative sentiment has returned to the market.
Omnicell (OMCL) is a medical systems provider with 19% growth in earnings expected in ’19. Sales grew at a pedestrian 9% in the recent quarter. A 97 RS stock. The stock’s RS line is well ahead of price in new-high territory, a plus.
Price sets up after staging a failed breakout two weeks ago. This one merits watching should the general market firm up.
Vanda Pharmaceuticals (VNDA) is a biotech with expectations for 100% earnings growth in ’19 along with 19% sales growth in the recent quarter. A 97 RS stock under extreme accumulation.
Price is recovering from its failed breakout two weeks ago. This is another that can be watched for when the market begins to reward momentum issues.
On the short side, the focus is on the liquid glamours (FAANG stocks) and inverse ETFs. At present, both are extended and do not offer attractive entry. These will be discussed in this evening’s video report. As noted in the last report, “…further markdowns are in store for these important bellwethers of the speculative sentiment.”
In sum, the speculative sentiment is still considered to be too weak to support successful long-side speculation. This is evident in the small number of attractive pattern setups, not to mention the cascading averages and the recent failures of a number of breakouts. Subscribers should be in a full cash position.
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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.