September 25, 2019

Little has changed from our Sunday report.

The growth sector remains under the gun, with virtually nothing in the way of pattern setups. This comes amid a consolidation period for the Nasdaq and S&P that shows their 50-day moving average lines drifting slightly downward.

Like most games, patience pays in this one. The impatient feel they must always be in the market. They do not recognize that every market and strategy will have periods of unattractiveness.

As mentioned a number of times, especially in the videos, one must adjust their risk in accordance with changing market conditions. Without any adjustment for changes in risk, one ends up playing the game in the same way one played it back in January – a particularly auspicious time to buy stock.

But on average, there are only a couple of Januarys each year. That is, periods in which many growth stocks build and break out of basing patterns. This most often occurs following an 8%-12% intermediate correction or bear market. This is when it pays to be aggressive, or at least more aggressive than usual.

Bill O’Neil has an analogy for adjusting one’s portfolio for changes in risk. He says it is like a tree bending in the breeze.

This service has attempted to do just that over the past couple of months.

Currently, there is one long setup in the growth sector, and it is discussed below. As was the case in Sunday’s report, this is only for subscribers who need some long exposure, e.g. a professional money manager may have a mandate to maintain a certain amount of long exposure. As well, it is important to always maintain a handle on which stocks are setting up, no matter which direction the general market is heading.

Otherwise, I do not intend to take a position in this name without a material change in general market health. It will not appear on the Focus List. For the vast majority of growth stocks, there will need to be a return of the speculative sentiment, i.e. a risk-on sensibility, prior to the reward-to-risk ratio tilting again in our favor.

The short side has been unappealing since the recent rallies in growth stocks have tended to be deeper than is my preference. In a downtrend, the deeper a rally is, the more likely it is to herald a new trend in the other direction (up).

Among the names, Goosehead Insurance (GSHD) is forecast by Wall Street to record 69% earnings growth in ’20. Revenue has expanded by 59% and 31% in the two recent quarters.

The stock forms a constructive, 11-week consolidation with a 22% depth. It is buyable on a takeout of the 51.47 pattern high. Earnings expected Oct. 31 (unconfirmed).

In sum, cash is king. Until the speculative sentiment returns to this market, growth stock breakouts should be avoided, including the one above.

Q&A

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: Please see the Monday video contained in the Monday report.

Comment from the same subscriber: Thanks again Kevin. Your service is so distinctive. I really appreciate the time you spent responding to my question and other subscriber questions, for that matter. I’ve been at this a long time and I’m still learning a lot from you. Thanks again.

Q: Very good question [from the other subscriber] and outstanding video [on Monday]. Thanks for taking the time. I will be watching again multiple times and taking notes. A huge amount of knowledge and I appreciate it. I have been struggling lately. Thanks.

A: You are welcome. No one using an O'Neil-like strategy of trading aggressive growth stocks is making money in this phase of the cycle. Stop trading. Period.

Kevin Marder

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Unless otherwise noted, charts created using TradeStation. ©TradeStation Technologies, 2001-2019. 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. Expected earnings release dates provided by EarningsWhispers.