Market Comment

September 4, 2018

September 4, 2018

Stocks remain in good shape, bolstered by strong earnings growth and still-low interest rates. The Nasdaq Composite and S&P 500 are just days off their all-time highs, while the advance’s breadth is solid.

Leadership in the growth sector has been notable, with a few liquid glamours leading the way along with numerous more-speculative issues, including Tilray (TLRY), Bandwidth (BAND), Stitch Fix (SFIX), Funko (FNKO), Twilio (TWLO), Canopy Growth (CGC), Goosehead Insurance (GSHD), Tabula Rasa Healthcare (TRHC), Five Below (FIVE), Neurocrine Biosciences (NBIX), Teladoc Health (TDOC), Staar Surgical (STAA), Alteryx (AYX), Carvana (CVNA), Liveperson (LPSN), Square (SQ), just to name 16.

The market’s strength has left it with few growth titles setting up in buyable basing patterns. The names profiled below reflect generally less technical quality than preferred, which is to be expected.

Notwithstanding this, there are 85 leaders within 10% of their 52-week high, a generous number indicative of the broad leadership of the growth sector.

Sector leadership remains the same as before the onset of the July-August consolidation in the averages. This means technology and consumer discretionary, with healthcare making a strong showing throughout the summer.

The only negative worth mentioning is interest-rate proxies like the financials, brokers, and banks, which put in new highs during Q1, but haven’t matched the highs in the averages since.

Among the names, Allakos (ALLK) is a recent new issue, coming public six weeks ago at 18. In its opening 10 days, it went up as much as 155%. Recent new issues that move up 50% or more in the first two months warrant special attention. These often become future market leaders.

With no earnings and no revenue, this is a very speculative issue. Very aggressive players might look at the 45 high as an entrance pivot.

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Altair Engineering (ALTR) is another recent new issue that was up 97% in its opening two weeks. The 50% rule proved prescient here, as ALTR has a 96 RS rank and has more than tripled since its offering. Earnings are expected up 59% in ’19. The group shows an RS rank of 93. The stock is under extreme accumulation.

Price forms an ascending triangle pattern and can be taken above the 41.81 high of 8/13.

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Apptio (APTI) should grow earnings by 400% in ’19. Revenue growth was a healthy 31% in the recent quarter. This is a 95 RS stock in a 93 RS group.

Price came out of a five-week flat base on Friday but reversed midstream to close just below the lip. It can be taken on a clearing of Friday’s high of 39.58.

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Aptinyx (APTX) is a recent new issue that rose more than 50% by its sixth day of trade. It is a biotech with no earnings and light revenue, making it a very speculative number. It is also quite thinly traded at $2.6MM in ADDV (average daily trading volume) and an $803MM market cap.

It is under extreme accumulation as it traces an ascending triangle. It can be taken above the 7/5 high of 25.21.

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Etsy (ETSY) should grow earnings by 50% in ’19, per the Street. Revenue growth was solid at 30% in the recent quarter. While revenue growth is not a strict buy criterion, it does show a higher quality of earnings when it is 20% or higher, and preferably 30% and up. This is a 99 RS rank stock. Mutual funds are in the 400-1,100 sweet spot, with 443 in the recent quarter. They are increasing nicely over the past few quarters.

The stock forms a four-week ascending triangle and can be entered on a takeout of the 8/27 high of 49.65 (aggressive) or the pattern top of 50.60 (less aggressive).

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Godaddy (GDDY) should grow earnings by 89% in ’19. The stock is under solid accumulation. Last week it broke out of a five-week, double-bottom-with-higher-low base. The week prior, it cleared the pattern’s midpoint on volume 41% above average. It is a good sign when a double bottom’s midpoint is taken out on brisk activity.

Last week, price idled just above the pivot point. GDDY can be taken above the 81.95 high of 8/29 which is the high of this short handle. Less-aggressive players might wish to give price more time to back and fill before considering entrance.

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Hubspot (HUBS) should post 63% earnings growth in ’19 per Wall Street analysts. Revenue growth has been quite steady over the past few quarters, at 38% most recently.

Price cleared the top of an 11-week, double-bottom base last week but lacked follow-through and idled right around the pivot. More-aggressive operators might enter above the 8/29 high of 144.55, while less-aggressive speculators will give price more time to back and fill.

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Momo (MOMO) is a Chinese social media platform with a ’19 earnings-growth estimate of 26% and sales growth of 58% in the recent quarter. Mutual funds are at 522 and the stock is under solid accumulation. The RS rank is 90.

MOMO is 15% off its high. While its current three-day pullback could be used as a platform for entry by a more-aggressive speculator, the preference here is to allow price more time in developing the right side of the 11-week consolidation it is forming.

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Servicenow (NOW) is an enterprise software developer with earnings growth estimated to be 34% in ’19. A 91 RS stock in a 93 RS group. Revenue expanded 41% in the recent quarter.

Last week price came out of a six-week flat base. On Wednesday, the breakout day, volume was 77% above average. There was another strong showing a few days’ prior, when price rose 4.7% on volume 66% above normal. As with other stocks last week, the breakout did not follow through, with price staying just above the pivot. NOW can be taken above the 8/29 high of 201.00.

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PTC (PTC) shows a Street estimate of 38% earnings growth in the September ’19 fiscal year. The stock’s weakness is its 8% revenue growth in the recent quarter. It is a 93 RS stock and 690 mutual funds own the shares, a plus.

Price has been forming an 11-week flat base with a base top of 100.79, from where it can be taken as a breakout entrance.

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Viking Therapeutics (VKTX) is a development-stage biotech issue with no earnings or revenue. Along with its price being just below 13, these make the stock a very speculative actor.

This is a 99 RS stock. In late May and June, it jumped 170% in under three weeks. Since then, it has been forming an 11-week base with a 31% depth, not excessive in light of its prior big move. Given its very speculative nature, VKTX should be allowed to form a handle to go with its cup pattern prior to entry.

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In sum, stocks remain in good shape, not showing the internal weakening in the average issue that has often been the precursor to a primary bull top. For the momentum player who favors base breakouts, the pickings are slim. This is a function of the market’s being a victim of its own success.

With a thin menu of pattern setups, the position trader may tread cautiously with fresh-money buys. Constructive pullbacks in leading issues may present more attractive opportunities than base breakouts in the short term. Bottom line: Breakouts continue to work, with failures few.

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, Marder Investment Advisors Corp., Kevin Marder, or an affiliate thereof held positions in SQ and STAA, though positions are subject to change at any time and without notice. Estimate data provided by Thomson Reuters.
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