October 3, 2018

The big picture is a market rotating away from small-cap/mid-cap/growth and into large-cap/S&P 500/blue-chip stocks. The clearest signs of this divergence can be found in charts of the cumulative NYSE advance-decline line and the % of NYSE stocks above their 50- and 200-day moving averages.

This rotation into lower-risk names is classic late-cycle behavior. It has been discussed numerous times in my MarketWatch column over the years. The key point: Breadth divergences have served as a reliable leading indicator of primary bull market tops. To wit, this occurred ahead of the ’87, ’90, ’98, ’00, and ’07 tops.

Divergence is not a precise leading indicator. It is a long-term signpost that has led market tops by several months to more than a year. While no indicator is infallible, a general rule of thumb might be to begin looking for a top after four months’ of divergence has occurred.

With that said, divergence is a secondary, or background, indicator. It does not replace the averages/leaders as a medium-term timing device.

Otherwise, there are very few leadership names worth mentioning for fresh-money breakout buys. Of note was Monday’s activity, which saw a number of speculative glamours being sold, some distributed. This continued on Tuesday. This type of behavior had not been seen in some time, so attention is accorded it.

At the same time, the market can do whatever it wants to do. Thus, it is important to always maintain an open mind as to what could happen. The above spate of selling might be short-lived – or it might be a microcosm of the narrowing general market advance.

Among the names, Coupa Software (COUP) is expected to turn a profit for the first time in the January ’20 fiscal year. Revenue increased 38% in the recent quarter. A 98 RS stock.

The stock moved up more than 60% in four months’ time. Price is four weeks into forming a flat base.  The 9/13 high of 82.88 can be used for a cheater entrance.

Canada Goose Holdings (GOOS) has a March ’20 fiscal year earnings growth estimate of 26%. Revenue is impressive at 58% in the recent quarter. A 97 RS stock.

Price forms a three-month consolidation. The 9/26 10% move on +312% volume as price cleared a cheater entrance was encouraging. The stock could be taken above the 9/28 high of 65.82.

Funko (FNKO), with a ’19 earnings estimate of +37% and 32% sales growth in its recent quarter, is three weeks into a basing process following a breakout at 9 and run-up to 31.

Attractive entry is not present, but opportunistic operators will be alert to any pullback that transpires. There was a question on the Twitter feed about “how big a pullback do you have in mind?” Unfortunately, there is no way of knowing in advance whether a pullback will be shallow or deep. Each person must address the situation according to their own unique makeup of risk tolerance, temperament, etc.

Irobot (IRBT) should grow earnings by 28% in ’19, according to Wall Street. Revenue grew 24% in the recent quarter. A 94 RS stock.

The stock cleared a 13-month consolidation on two days of solid volume in late August. However, the last four weeks of the right side of its pattern showed next to no pullback en route to a 56% gain. The stock paid the price as post-breakout follow-through was minimal. And a week later, sellers emerged to drive IRBT 16% lower.

IRBT is five weeks into a new consolidation. A cheater entrance above the 114.68 high of 9/19 could be considered, as could the 118.75 pivot high of 8/28.

Mongodb (MDB) came public at 24 nearly a year ago, and has earned its 98 RS rank by moving to as high as 85.25 a few weeks ago. There are no earnings, but rapid sales growth of 61% in the recent quarter.

Price had been confined to a tight range for the past three weeks before showing two major distribution days in the last four outings. Given the high RS rank and high price persistency whenever it has trended, MDB is worth having on a watch list to see if it can recover back to above 80.

Neurocrine Biosciences (NBIX) shows a ’19 estimate of $1.89 a share vs. the ’18 estimate of $0.19 a share. A 96 RS rank and under extreme accumulation.

The stock is four weeks into a new flat base and can be considered above the 126.98 high of 9/13.

Pinduoduo (PDD) is a recent new issue that came public in late July at 19. It recently cleared its first base, but could not follow through since the right side of the cup was completed in more or less straight-up fashion. This name is intriguing as sequential revenue growth was a ridiculous 86% in its recent quarter over the prior quarter.

An aggressive but viable entry would be above the 10/1 high of 28.18. Volume dried up over the last five days of September, a plus.

Tilray (TLRY) may be the biggest-winning stock of the year. I discussed it on the Twitter feed on Aug. 14 with the price at 24.23. In that tweet, an entrance pivot was suggested and highlighted on the chart at 28.44. This was taken out the following day (Aug. 15).

On Aug. 20, TLRY was mentioned again, this time with price at 35.48, or 4% beyond the pivot entrance of TLRY’s first base, i.e. still buyable.

The stock ended up at 300 on Sept. 19, +955% from the first pivot mentioned and +746% from the second mention.

Very aggressive players can consider TLRY above the 10/1 high of 173.46.

In sum, the bull market is showing classic signs of late-cycle behavior as participants rotate out of higher-risk and interest-sensitive issues and into those perceived as offering lower risk. The momentum player in growth titles has few pattern setups for base breakout plays. In part, this is the market being a victim of its own success.

The bull is still playable.

But players should recognize that the rising tide that lifted most boats – falling interest rates – is no longer. The narrowing advance means stock selection is becoming more important, as is tempering one’s expectations of what is possible for the time being.

Kevin Marder