Analyzing this market is an open and shut case.
That is, thanks to what Bill O’Neil always has said: Watch the major averages and the leading stocks. That’s it. Those two indicators have withstood the test of time, obviating the need for anything else.
These are not crystal ball indicators, the type that tell you where the market is headed. Those don’t exist. But the averages and leaders do serve to keep one on the right side of the market.
The averages show a clear downtrend of lower highs and lower lows up until the last three sessions, including Thursday. One would normally want to see Nasdaq volume picking up substantially to confirm this newfound conviction (see the Nasdaq Composite chart below).
However, this happens to be perhaps the most popular week in the year for vacations. This accounts for the below-average activity on both Nasdaq and New York Stock Exchange. Of note are the Nasdaq closes of Tuesday, Wednesday and Thursday. They are in the upper quartile of the day’s range and close to the day’s high. This is a distinct positive.
As for the leading stocks, senior growth issues hold up fairly well. This is key. Sure, Amazon.com AMZN, +1.51% Netflix NFLX, -1.47% and Tesla TSLA, -1.90% have been as much as 13% off their highs. However, they are well-deserving of a rest in the wake of big gains. These pullbacks appear normal, although in Amazon’s case there is too much high-volume selling for comfort.
Meanwhile, Apple AAPL, +0.73% Facebook FB, +1.78% Tesla, Paypal PYPL, +2.43% Alibaba BABA, +1.05% Salesforce.com CRM, -1.06% Baidu BIDU, -1.50% and Tencent Holdings TCEHY, +1.92% trade close to their highs.
So, generally, the action of the leading stocks, which have been large growth names for some time, remains in good shape. This could change tomorrow or next week. But since there are no crystal balls here, we operate on what the market has already done.
Among the names, Apple holds strong for one reason: The Street expects it to post 20% earnings growth in the September 2018 fiscal year. This would be a pick-up from the expected 9% growth of the 2017 fiscal year. Ultra-liquid names that lead the market and are forecast to grow earnings by 20% do not grow on trees. They are prized by institutions with a growth mandate. Very few of them exist in a market which has been light on initial public offerings for a number of years.
For speculators seeking some long exposure with low risk attached, entrance at the current price of $164 could be had. Using the most recent swing low of $155.11 (the Aug. 21 low) as a protective stop, risk would be about 5.4%. With a junior starter position (half normal), de facto risk would be about 2.7%.
As price is already 5% past the top of the most recent base, the stock should not be chased beyond current levels. This, plus Sept. 12 being the iPhone 8 event, augurs for a junior position to begin with and not a full-boat position. (This event could possibly spur a buy-the-rumor, sell-the-news reaction.)
(As always, a protective stop should be used to mitigate risk, along with a starter position that is half normal size, or less. This initial position could be added to if the stock proves itself. In most cases, a position should not be entered when price is extended, i.e. more than 5% past the top of its base for breakout buys.)
Tesla gives a good account of itself as it repairs its chart pattern following the June-July slide from $386 to $303. Price sits at $345. There has not been any high-volume selling in weeks. The $370 swing high of Aug. 9 offers a convenient way of entering the stock without taking the risk of it rolling over from here.
Specifically, a breakout above $370 on big volume should offer the evidence needed to show Tesla is on solid footing with the June-July malaise behind it.
Exelixis EXEL, -2.20% develops small-molecule treatments for cancer. The Bay Area-headquartered concern shed red ink in 2015 and 2016 but is projected by most analysts to score a per-share profit of 26 cents this year and 61 cents next. Revenue growth has been triple-digit in recent quarters.
Technically, the stock broke out of a six-week flat base Thursday, though volume was likely below average due to the plethora of end-of-summer vacations. At this writing, price is 3% above the top of the base and can be taken here with a protective stop placed below the $26.08 low of 8/18 and 8/21.
To sum, our two primary indicators, the price-volume behavior of the averages and the action of the leading stocks, point to the market’s direction being up. For its part, the Nasdaq Composite has had a three-day turnaround of sorts this week. While volume was light, next week will provide a clearer reading as trading desks will be close to fully-staffed.
As well, leading growth stocks appear in good shape, with some going through what seems to be normal corrective action following big gains earlier in the year.
A caveat: September is known to be the worst-performing year on average historically.
For intraday market comments and stock ideas: https://twitter.com/mardermarket
Earnings estimate data provided by Thomson Reuters.
The views represent those of Marder Investment Advisors Corp. (“MIAC”). At the time of this writing, of the stocks mentioned in this report, Kevin Marder and/or MIAC held no positions, though positions are subject to change at any time and without notice. Neither MIAC nor any of its affiliates will be liable, and we accept no liability whatsoever, for any losses any recipient of this report may suffer as a result of his or her or its use of this report or any of its contents.