Market Comment

June 13, 2018

June 13, 2018

Stocks remain in the catbird seat, with Nasdaq trading volume picking up slightly. Leadership continues in the growth sector and Nasdaq/small-cap realm as participants favor groups with lesser trade-tariff risk.

Retail has now joined consumer discretionary and technology as the outperforming broad sectors. Breadth has expanded notably over the past week, with the NYSE advance-decline line way out in front of the S&P 500.

The backdrop is largely benign, and risk centers on higher interest rates and tariff uncertainty. With a still-attractive environment of lower rates and inflation, institutions are putting money to work in the liquid glamours that ruled the roost last year.

For the position trader in aggressive growth titles, the breakouts continue, with Tuesday seeing moves in Blackline (BL) and Qualys (QLYS). Overall, however, most speculative growth-stock glamours have already broken out.

Fewer names, then, remain unexploited. This is part and parcel of the market’s own success, and can normally be expected once a move in the averages has been underway for 13 weeks or so. A few of the names listed below reflect a slimmer menu from which to choose. This explains the inclusion of one actor changing hands in the single-digits.

Among the names, Akamai Technologies (AKAM) had its 15 minutes in the sun during the final two months of 1999 when it more than tripled. It then descended to 56 cents from $345 when the Bubble Era deflated. Presently, the earnings estimates are not the glossiest, especially the 15% expected next year, but earnings stability is quite high which is obviously appealing to large investors.

Last week, the stock came out of a base on +129% volume. Since then, it has pulled back slightly before moving out again. Tuesday’s volume was +63%, quite bullish. It can be taken at current levels around 80.57 which is 4% past the pivot. The stock’s extreme accumulation is believed to help mitigate the risk of buying here.

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Alteryx (AYX) is a database software outfit that has nearly tripled since coming public 15 months ago. This is a 95 RS name in a 97 RS group. Revenue growth has been rock-solid at 50%-55% over each of the last four quarters. Price is about 1% above its entrance pivot of 39.21 in the wake of Monday’s break above a seven-week base.

Tuesday saw price print an apparent reversal bar. Participants can monitor price to see if it stalls for the next couple of days and regains its sea legs. If so, the stock can then be taken in conjunction with a handle being formed.

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Alibaba Group (BABA) has shown solid accumulation over the medium term and its industry group is in the 95th percentile according to relative price strength over the past six months. Its recent breakout attempt came on 12% above average volume, though the day before showed turnover expanding to 32% above normal. For a $524B market cap company, that is respectable.

BABA offers an entrance around current levels of 209.08. For more confirmation, the entry could be made above the 6/5 high of 211.70. As always, a junior position (one-half or less of normal) should be used initially in order to mitigate the risk of being incorrect. If price does what it is expected to do, an add-on position can be placed subsequently.

A plus is the solid accumulation seen over the medium-term.

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Blackline (BL) is in the area of software for accounting and finance operations. It came public in October 2016 at 17 and was last at 44 and change. Earnings are expected to balloon from a forecasted three cents a share this year to 13 cents next year. Revenue growth has been 42% and 34% in the last two quarters.

On Tuesday, BL broke out of its three-month base on +93% volume and is currently 5% past its base top. In most but not all cases, the stock has in the past pulled back following breakout. In this case, price can be watched to see what sort of pullback may occur.

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Ceridian HCM Holding (CDAY) produces software for human resources and payroll functions. The recent new issue is expected to catapult earnings to 51 cents a share in 2019 from a projected two cents this year. Of note is the move from 22 on IPO day to 38 in three weeks’ time. This exceeds the 50% that is preferable to see at minimum in the first two or three months following a company going public.

A negative is the lukewarm revenue growth of 7% and 12% shown in the last two quarters. CDAY is currently building its first base, which has a respectable 15% depth. Aggressive players might take the breakout past the pattern high of 38.87, though preferably following at least another few days of basing.

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Endocyte (ECYT) is a development-stage company with no earnings or revenue. Thus, a player must rely upon the chart alone when it comes to available info. A plus is the extreme accumulation seen in the last few months. Tuesday, price vaulted past the 15 level of its three-week shelf to an intraday high of 15.45 on heavy volume before easing back to 14.69.

For a reasonable speculation, the stock should not be taken until more time has been spent backing and filling over at least the next five days.

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Facebook (FB) shows earnings estimates of 26%/18 for ‘18/’19. Revenue has swelled at rates of 45%-49% in each of the last four quarters, a mean feat for a $554B market cap concern. On the right side of its four-month base, it has shown two periods of constructive volume dry-ups. Late last week, price touched its 20 ma, which corresponded to the top of its most recent congestion phase.

FB can be taken above the 195.32 high of its base.

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GDS Holdings (GDS) is expected to post more red ink this year and next. Meanwhile, revenue growth has accelerated from 40% to 43% to 73% to 76% in recent quarters. The Chinese data-center operator is up about 30% from its last breakout.

It is presently forming a three-week shelf which earlier saw some high volume due to a convertible offering. This distribution notwithstanding, GDS witnessed nice accumulation along the right side of its well-formed, March-May cup.

GDS can be taken above the 42.33 of its current shelf. While there is a higher risk of failure due to the short length of the pattern – just three weeks – the aforementioned accumulation may help mitigate the risk.

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Paypal Holdings (PYPL) has estimated earnings growth of 23% this year and 21% in 2019. This is just above the 20% minimum that is preferred but below the 40% that is targeted. For less-aggressive accounts, it may fit the bill due to its deep liquidity and high level of institutional sponsorship.

The stock is forming a four-month consolidation with a few major accumulation days on the right side of the pattern. It is buyable above the 86.32 base top as part of a breakout entrance.

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Qualys (QLYS) is a cloud security provider with earnings growth forecasts of 34%/17% for ‘18/’19. It is a 94 RS name in a 94 RS industry group. Five major accumulation days populate the right side of the stock’s basing pattern.

QLYS cleared the top of its seven-week, double-bottom base Monday with volume 96% more than average as price gained 4.5%. It then followed through on Tuesday with +103% volume on a 3.7% price rise. It is now 4% above its pivot and can be monitored for a pullback.

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RingCentral (RNG) should post earnings growth of 138%/26% in ‘18/’19 according to Wall Street forecasters. Revenue growth has been rock-solid at 34% for each of the last three quarters. This is a 95 RS stock in a 99 RS industry group. The enterprise software developer can either be taken above the 81.20 top of its four-week pattern or the 79.90 level of the last swing high.

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Rapid7 (RPD) has been a perennial money-loser, though the Street eyes a loss of just three cents a share in 2019. Revenue at the security software maker has been in the 20%-28% range during the past three quarters. A few encouraging days of buying have materialized as price made its way up the right side of its four-week shelf.

The 33.32 level corresponding to 6/6’s high could be used as a cheater entrance, else the 33.70 pivot for a formal level.

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Spotify Technology (SPOT) has always lost money on an annual basis, though 2019’s estimate of a 94-cent-a-share deficit would be the least in six years. Revenue growth has been impressive at 45%-50% for each of the most recent four quarters.

Friday saw the completion and breakout of a five-week base. Volume was the highest in three weeks. In light of price making what is essentially a 15% advance straight up the right side of the base, the stock should not be chased in here, but should be allowed to let off some steam. It should be monitored for a pullback or the formation of a handle.

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SunlandsOnline (STG) is a Chinese online provider of educational services. Earnings are expected to go from a loss of 39 cents a share this year to a 70-cent profit next year. Revenue growth has been blistering, up triple-digits for the last four quarters.

Price is forming its first base since coming public Mar. 23. An obvious entrance would be above the 11.40 swing high of May 11. Otherwise, the stock can be monitored for more backing and filling which might lead to an alternative pivot. Teen-priced stocks carry more risk than higher-priced names, all else equal. STG is actually a pre-teen, and thus should only appeal to very aggressive speculators.

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In sum, the market’s rally off the late-April low proceeds apace, with no sign of worrisome selling pressure. Breadth is strong, while volume remains less than desired. The momentum player should exercise patience in light of the dwindling list of issues yet to break out.

Patience pays.

Kevin Marder

For intraday ideas and analysis: https://twitter.com/mardermarket

Charts created using TradeStation. ©TradeStation Technologies, 2001-2018. 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, Gil Morales & Company LLC (“GMC”), Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held no position, though positions are subject to change at any time and without notice.
Gil Morales & Company, LLC (“GMC”), 8033 Sunset Boulevard, Suite 830, Los Angeles, California, 90046. GMC is a Registered Investment Adviser. This information is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to GMC, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Gil Morales & Company, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2008-2018 Gil Morales & Company, LLC. All rights reserved.