September 29, 2019

Stocks were down for the count last week, losing ground in four of the five sessions. The Nasdaq’s relative strength line broke to a new low for the move and sits at a level not seen in nearly four months.

In particular, formerly-leading growth stocks suffered. On Friday, the IBD 50 ETF (FFTY), a barometer for the sector, lost five times as much as the S&P 500, and about twice as much as the Nasdaq.

Relative strength is seen in homebuilders and defensive groups like the utilities and REITs. Defensive stocks are benefiting by institutions seeking shelter amid signs of slowing economic growth.

Also outperforming are semiconductors, a curious development given their sensitivity to U.S.-China trade talks.

Markets like this one, in which growth stocks are correcting to the point where none set up technically, are not particularly unusual. I recall a similar market existed in April 1997. Stocks were in a correction and growth issues had been taken apart. There was concern about rising bond yields, which had stoked the selling.

Then, either the Fed decided to cut its overnight federal funds rate or it began hinting this would occur (I cannot recall which occurred). All of a sudden, out of nowhere, perhaps the most ferocious turnaround and rally I had witnessed commenced during the five days of Apr. 29-May 5.

Here is the key point: During this five-day period, roughly 120 growth stocks completed the right sides of their bases in a hurry. The market then rallied for more than five months.

The low interest rates of recent years have provided growth with an extended period of leadership. Unless one expects a period of higher inflation and higher interest rates, there is no reason to think growth, which is highly sensitive to rates, cannot lead once the market is done discounting a period of slower economic growth. Of course, when the current correction will end is not knowable unless one is so lucky as to own a crystal ball.

Meanwhile, our Watch List has stood at 24 names in recent days. The only growth title that actually had set up in a base was Goosehead Insurance (GSHD). This was mentioned in Wednesday’s report in case someone had to hold some long exposure. It was not on the Focus List.

It broke out Friday and then, unsurprisingly, reversed five minutes later to close the day 5% below its pivot.

As discussed recently, I learned years ago that it is not a good idea to expect that the one or two or five names that hold up amid a deteriorating growth sector will amount to much post-breakout.

When they raid the brothel, they get everyone, including the piano player.

Along these lines, less-experienced players will continue to buy every breakout despite the market’s message that the time is not right. It is my hope that you have learned something from the market’s recent action.

Goosehead was the last of the Mohicans. In the wake of its breakout and reversal, there are no pattern setups in the growth sector. Since some of you may not regularly review a batch of stock charts, you may be unaware of the extent of the damage to growth. The following charts show a dozen names from the 24-issue Watch List. These had actually been the better actors of the growth sector.

In sum, the game plan will seek to capitalize on inverse index ETFs and growth-stock setups on the short side. Cash is king.

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.