“Drawdowns are a fact of trading, and how a trader deals with drawdowns will determine the end game.”
The averages have seen some distribution, but not enough to cause concern. The Nasdaq Composite has seen two of them as marked on the below chart, Friday being excused due to it being the quarterly expiration of certain options and futures contracts.
The Naz has been off a maximum of 3% in this two-week reaction. Beneath the surface, however, there has been deterioration in growth-stock leaders that is not evident by simply looking at the averages.
The most prominent example of this leadership decay has been the biotechs, with iShares Nasdaq Biotech (IBB) showing three major distribution days since topping three weeks ago. While Friday was not technically a d-day due to it being a quarterly witching session, it was notable since it took out the 50-day line and, more important, a logical support area in the form of the prior congestion area, an abc pattern.
In the bios, it was Celgene (CELG) that first encountered large-investor selling back in January.
This was followed by Gilead Sciences (GILD) and, more recently, Biogen (BIIB) and Alexion Pharmaceuticals (ALXN).
A market can withstand the topping of its leading group, in this case the bios, if other groups are able to take the reins. Often, however, a top in the high-profile leader like the bios is symptomatic with the peak in a cycle’s speculative sentiment. And when the speculative sentiment peaks and then begins to dull, other leading titles feel the effect.
This is what is believed to be transpiring.
At present, the tops in biotech issues coincide with pullbacks in the liquid glamours that are most closely watched here for sentiment, i.e. Netflix (NFLX), Tesla Motors (TSLA), Facebook (FB), and Priceline.com (PCLN).
In addition to these, a few dozen other secondary and tertiary glamours are breaking down. Many of these are bios, which comprise about 27% of the market’s speculative growth-stock glamours priced at $13 and above.
As such, a heavy cash position is sensible for the intermediate-term speculator in high relative-strength names.
In the event the weakening trend in the market’s growth-stock leadership subsides and even firms, the following titles are listed for possible consideration on the long side.
Among the names, Diamondback Energy (FANG) was discussed in the MarketWatch column on Feb. 6: “Based on the high estimate of earnings growth in 2014, the solid sequential revenue growth in recent quarters, the excellent relative price strength seen over the past three weeks, and the sound basing pattern, a very aggressive speculator can consider a break of the midpoint of the base at 53.83 to represent a potential cheater entrance.”
The stock eventually moved up to 68 before forming a tight, four-week shelf. Some of the reasons we still like the stock are the same ones listed above and mentioned six weeks ago: Earnings estimates of 118%/32% in ‘14/’15, very sizable sequential revenue growth in recent quarters, and a nice pattern with very little giveback considering price was up over 50% in six weeks.
A standard breakout entrance above the 68 high of 2/24 would be suitable provided there is some firming in the growth sector overall.
Envestnet (ENV) provides solutions and services to financial advisors. Most analysts on Wall Street expect earnings growth of 31%/49% in ‘14/’15. Revenue growth has been 65% and 68% in the last two quarters, respectively.
Technically, ENV forms a nine-week base. Given the weakening trend of numerous growth-stock glamours, we would not be keen on a cheater entrance, but would prefer to consider a standard base- breakout as a potential avenue into the stock. Worth watching to see how the right side of the base plays out.
Ligand Pharmaceuticals (LGND) is a biotech with decent liquidity at $27.5MM shares in average daily dollar volume. Wall Street looks for earnings growth of 109%/60% in ‘14/’15. This is a 96 relative strength stock in a 99 rs industry group. Price forms a five-week, mini double-bottom base. A negative was Friday’s high-volume sell-off. We would be watching for a standard base breakout entrance above the 80.42 high of 2/14. This is a 96 relative strength stock in a 99 rs group.
Matador Resources (MTDR) is an oil & gas explorer and producer using fracking technology principally in Texas, New Mexico, and Louisiana. The attraction here is the estimated earnings growth of 60%/40% in ‘14/’15. Technically, the pattern resembles a cup-with-deep-handle. Due to the handle’s 16% depth, we would prefer to see more backing and filling prior to considering a handle breakout to be attractive. More time needed here, but worth watching.
Michael Kors Holdings (KORS) is expected to post earnings growth of 23% in the March ’15 fiscal year, down from the 58% expected in ’14. Based on this expected earnings growth, the heady pace of revenue growth (39% and 59% in last two quarters), the 2/04 move of 17% on volume nearly six times normal, and the current four-week flat shelf with a depth of only 4.9%, an entrance above the 101.04 high of 2/25 would be considered attractive.
Salix Pharmaceuticals (SLXP) is an ethical drug company specializing in gastrointestinal disorders. The Street eyes earnings growth of 93%/17% in ‘14/’15. Price forms a three-week shelf with higher lows and a depth of 12%. The situation is not perfect, as there are a couple of major distribution days in the pattern. Regardless, this is a high relative-strength stock that has held the 20 ma (not shown) for some time, and deserves a spot on our watch list.
Sierra Wireless (SWIR) makes telecommunications infrastructure components such as gateways and routers. Earnings are slated to grow by 109%/73% in ‘14/’15, according to most analysts.
Sierra stands out because it is one of the few bases of at least five weeks being formed in the glamour complex. The pattern resembles an 11-week cup-with-low handle. Given overall weakness in some of the key leading stocks, as discussed above, we would not be interested in using the 3/17 high of this handle (24.84) as a possible cheater entrance. We would instead like to see more time put in (more basing) with an eye to a standard base breakout.
US Silica Holdings (SLCA) is a producer of silica sand used as a proppant in oil & gas fracking and other industrial applications. Most analysts on Wall Street forecast earnings to grow by 25%/36% in ‘14/’15. Technically, price came off the bottom of its five-month base and then rose over 50% in just five weeks. It attempted to come out of this formation last week, but was turned back. We believe the stock needs at least a few more weeks of basing before it can be taken seriously as a breakout candidate. For now, it is worth watching in a market without many dynamic issues that form bona fide bases.
Valeant Pharmaceuticals (VRX) is a fast-growth branded-drug company with a high stability of earnings growth and a very liquid market for its shares. Since ’08, it has moved up as much as 25-fold. It is a 90 relative strength stock in a 99 rs group. Price is three weeks into a basing pattern after taking out its 50-day moving average line on Friday. We would be watching VRX to see if it can recover, continue its constructive pattern, and then stage an eventual base breakout.
After seeing per-share earnings decline from 38 cents in ’12 to 17 cents in ’13 and an estimated six cents in ’14, most analysts expect Zillow (Z) to see net jump to 69 cents in ’15. All throughout this period, revenue has grown very consistently and at high levels of 75%, 67%, 73%, 71%, 69%, 67%, and 70% over the past seven periods. The stock forms a six-month base and is under extreme accumulation. In five of the past nine sessions, Z has printed major accumulation days. At this juncture, and given the weakening action of leading stocks, we would insist on Z forming a handle or other sideways consolidation before considering a breakout entrance. Worth watching.
In summation, while the averages have not shown undue wear, the leading stocks tell a different story. Many are breaking down. A generous cash position is advised for the medium-term speculator in high relative-strength shares.
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