Market Comment

July 18, 2018

July 18, 2018

The averages make progress as they put their brief June swoon behind them. Volume remains less than desired, especially at the level of the averages. For example, activity has actually diminished on all four S&P rallies since the Apr. 2 low.

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There are dozens of glamours that are four weeks into their consolidation patterns. This has, and should continue to, bode well for the market as a whole. Markets tend to get into trouble when breadth, volume, and leadership fall apart.

Of these three, volume has been the soft spot. However, when it has needed to come into some of the early breakouts, it has, generally. The names discussed below do not show much accumulation in their basing patterns. This is part and parcel of what the market is giving us.

Recent new issues, which succumbed to a speculative blow-off in June-July, have sorted themselves out in terms of the wheat and the chaff. The wheat are the ones that have bounced back to some degree like tennis balls. Their buoyancy is a feather in the market’s cap and shows the speculative sentiment is alive despite the recent lagging performance of small-caps.

This report has highlighted four recent new issues as perhaps holding the most potential. These are not for everyone, but for very aggressive players they can provide a foot in the door of some potential future leaders. The first three are the ones that stand above the rest due to liquidity and the fundamental story, the first two in particular.

These four do not offer attractive entrance but should be watched closely for an opportunity, preferably before they break out.

Among the names, Abiomed (ABMD) is expected to put up earnings growth of 49%/34% in the March ‘19/’20 fiscal years. Revenue growth is solid at 34% and 40% in the most recent quarters. A 98 RS stock in a 99 RS group. Following a 62% move in less than two months, price has been forming a four-week shelf with a depth of just 13%, considered shallow in light of the big advance.

Unless a cheater entrance develops meanwhile, the name can be taken above the 450.65 swing high of 6/21. Earnings expected 7/26. This means if a position is held through earnings, its size should be calibrated to withstand a substantial loss without a meaningful impact on an account should the post-earnings reaction be negative.

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Align Technology (ALGN) is a steady-eddy type of earnings grower, with estimates of 31%/27% in ‘18/’19. Earnings stability is high at just a 13% standard deviation over the past several years. Revenue growth is robust at 44%/41% in the last two quarters. A 97 RS rank in a 99 RS group.

Price forms a four-week mini-cup and can be taken above the 371.55 high of the pattern. Earnings expected 7/25, so please plan any pre-earnings trade accordingly.

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Gds Holdings (GDS) has no earnings, but sales acceleration in recent quarters, with the figures up 73% and 76% in the two recent quarters. A 99 RS stock. GDS can be taken above the 7/12 high of 46.18. Earnings are expected 8/8.

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Huya (HUYA) is one of four recent new issues that stand out. This company has a 50% market share of the live-streaming gaming market in China. It is quite popular to view professional gamers compete live in a market that some believe will rival the size of some American sporting leagues. Earnings are expected to be up 117% in ’19 after a big jump to profitability this year. Revenue growth was triple-digit in the most recent quarter.

HUYA went up fourfold right after its May offering. After correcting for three weeks, price is recovering. At present, there is no attractive entrance, but this should be monitored for a pullback or sideways drift. Otherwise, a formal base breakout can be contemplated. For very aggressive operators only. Earnings expected 7/28.

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Immunomedics (IMMU) is a development-stage biotech company with no earnings or real revenue. A 98 RS stock in a 96 RS group. Under solid accumulation. Price is forming a five-week, constructive base with a nice tightening of price action in the last two weeks. Can be taken above the 26.00 high as a cheater entrance, or above the base top of 26.48 for a traditional entrance.

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Iqiyi (IQ) is the second of four recent new issues that stand out. This is the Netflix of China with a commanding market share. No earnings, but revenue growth has been 63% in the last two quarters. A 99 RS stock in a 99 RS group. The stock nearly tripled in seven weeks in Q2. It is now basing, but does not yet offer attractive entrance.

Very aggressive traders will want to watch this one closely for a pullback or sideways drift which might be used as a cheater entrance. Otherwise, a formal base breakout can be contemplated. Earnings expected 7/28.

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Nlight (LASR) is a third promising recent new issue. Earnings are expected to be up 533%/45% in ‘18/’19. Revenue grew 42% in the most recent quarter. Price initially went from 16 to 42.79 in five weeks following the offering. The last two days have shown big price gains as it quickly ramps up the right side of its base.

LASR does not offer attractive entrance, but should be watched to see if it can form a handle around the area of its 42.79 high, if not earlier. The stock is on the thinner side (market cap: $1.4MM, ADDV: $9MM).

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Mongodb (MDB) is the fourth recent new issue that deserves special attention. No earnings, but revenue grew by 50%/49% in the most recent quarters. A 97 RS stock in a 97 RS group. Price forms a five-week, mini cup-with-handle, and can be taken above the handle high of 58.90.

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New Relic (NEWR) should see earnings grow 92% in the March ’20 fiscal year, per most Wall Street analysts. Revenue growth has been rock solid, ranging between 33% and 37% over the past four quarters. A 98 RS stock in a 97 RS group. Price briefly cleared the top of its four-week v-shaped pattern Tuesday before going out below the lip. Volume was disappointing at -39%, in line with Nasdaq volume being -16%.

Price could be taken above Tuesday’s high of 111.87 as an aggressive entrance.

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Pure Storage (PSTG) shows a 9-cent loss in the ’18 fiscal year, a 15-cent profit in the January ’19 fiscal year, and a 173% jump to 41 cents in the ’20 fiscal year. Revenue growth over the past four quarters has been a bulky 38%, 41%, 48%, and 40%. This is a 94 RS stock. Price action has tightened over the past three weeks. PSTG can be taken above the 25.62 high of its well-formed base. The 7/9 high of 24.85 could be used as a cheater entrance assuming volume shows up.

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Shopify (SHOP) has been a favored name. It has a big estimate of 241% earnings growth in ’19, big sales growth of 75%/72%/71%/68% in recent quarters, is quite liquid at $17B in market cap and $222MM in ADDV, and has 617 mutual funds owning it. (Empirical evidence shows that the 400-1100 range for mutual funds’ ownership is a sweet spot for growth actors.)

Accumulation has been nonexistent on the right side of its four-week, v-shaped cup. The stock can be taken above the 175.11 base top on big volume. Earnings are expected 7/31.

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Square (SQ) has been another favored name. Earnings are forecast by the Street to grow a beefy 70%/74%  in ‘18/’19. Revenue has shown growth acceleration at 26%, 33%, 36%, and 45% in recent quarters. Mutual fund sponsorship totals 741 funds. A 98 RS stock. Price forms a four-week pattern with no major accumulation days. SQ can be taken on a big-volume move through the 69.40 base top. Earnings are expected 7/31.

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Varonis Systems (VRNS) is predicted to show an earnings growth decline for ’18, followed by a record earnings amount for ’19, up an estimated 560%. Revenue has grown 30%/31%/35%/35% in recent quarters. A 95 RS stock in a 96 RS group. Price can be taken above the 83.10 base top on big volume. Earnings are expected 7/30.

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In sum, as noted in last week’s report and in the above, the better behavior of some recent new issues speaks to the presence of a certain amount of speculative sentiment, an ingredient of any bull market. As well, the basing action of scores of growth stocks speaks. To become negative on shares, there would need to be wholesale breakdowns in the leadership with multiple major distribution days in the averages.

Kevin Marder

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The views contained herein represent those of Marder Investment Advisors Corp. At the time of this writing, of the stocks mentioned in this report, Gil Morales & Company LLC (“GMC”), 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.
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