To All Subscribers:
Today I received the following email from a subscriber.
Q: Hi Kevin, I've always struggled with judging how many setups are forming in a given market. You come up with 5. Marketsmith has 23 stocks in their “Near Pivot” list. In addition to the near pivot list, I'm seeing what I think are reasonable setups in stocks like GOOGL, AYI, MCHP, QRVO, AMED, TNDM, NKE, EGRX, JD, QCOM, RP, KMX, NBIX, FND, GSHD, ORLY. How do you weigh set-ups in stocks whose eps growth is good but less than 20%--do they count in your analysis of the market? Or to ask it another way, what don't you like about these additional setups? Thanks.
A: I have created a 58-minute video to answer your questions and to explain why there are few pattern setups in the current market which are believed to be constructive. Each of the 16 names mentioned in your email are discussed, as are some of the stocks in the MarketSmith "Near Pivot" list, to which you also refer.
You have picked out some constructive chart patterns. However, nearly all show a lack of relative strength (flat RS line slope, instead of the upward-sloping line that shows a stock has outperformed previously). This tells us the stock is not a leader. We are only interested in stocks that lead the market higher. Relative strength begets relative strength.
A second weakness of most of your charts is a lack of strong earnings growth estimates for the 2020 year. This is normal for most value/cyclical stocks. I would like to see at least 20% expected earnings growth, but prefer 30%-40% or more.
To review, the three buy criteria are:
Earnings estimates for the current and next fiscal years. Also included are the last 1-2 quarters of revenue growth.
Relative strength is upward sloping over the past two or three months.
Technical chart pattern, e.g. a base.
In some cases, an absence of solid earnings estimates is acceptable as long as the stock is, or is expected to shortly be, a real leader. I call this "trading off the chart," whereby constructive technicals override weak earnings and/or revenue growth.
Thank you for your questions.
To view the video, please click here.