“Nearly all men can stand adversity, but if you want to test a man’s character, let him trade.”
— Old Trader
Last week’s report noted that “…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.”
The weakness in leading stocks ended up preceding the Nasdaq Composite’s worst week in 5 ½ months. That last week’s loss in the Naz was just 2.8% says something about just how unidirectional shares have been.
As the below chart shows, the last six sessions have all shown a propensity for the Naz to close the day lower than the open. Early-up, late-down is a sign of a down market, whether a medium-term correction or a bear.
The Nasdaq has dropped as much as 5.5% from its Mar. 6 peak. Should the index decline at least 8% from its high, it will make sense to look for an O’Neil follow-through day. However, as previously mentioned, over the years we have found it more advantageous to overweight the action of the leading stocks vs. an FTD.
Of interest is the nature of the decline in the glamours. The sacred cows, those institutional must-owns that are normally held tightly by large investors for as long as possible during a market decline, drop just as much as the more-speculative leaders. So Celgene (CELG) is off 20% from its high, Facebook (FB) lower by 17%, and Priceline.com (PCLN) 14%.
Meanwhile, the blue-chip averages hold up much better than the speculative growth stock glamours. For example, the S&P 500 has been off as much as 2.3%. This compares with the Russell 2000, which has lost up to 5.7%.
While anything can happen, the big picture is that of a market that has not suffered as much internally as is the case just prior to a primary top. Translation: The breadth of the advance in the averages has not weakened enough to suggest the bull market is ending. In the meantime, most growth stocks need to repair the technical damage to their patterns.
A few titles that we are watching are listed below . Their quantity and quality say something about long-side opportunity in growth shares. This will change, and it never pays to be complacent.
Among the names, Aercap Holdings (AER) is expected to post earnings growth of 25%/32% in ‘14/’15. The company leases aircraft and related engines and parts to passenger airlines and cargo companies. This is a cyclical company. It is listed here due to a scarcity of growth stocks with pattern setups.
This is a 97 percentile relative strength ranked stock in a 91 rs group. AER forms a four-week consolidation directly on top of its prior, nine-week pattern, last week finding support twice at its 50-day moving average line. The current shelf is 10% deep, considered positive. An aggressive speculator could consider using the 43.69 high of 2/28 as an entrance pivot for a standard breakout.
Diamondback Energy (FANG) was noted in the MarketWatch column of Feb. 6 as buyable above 53.83. It was again discussed here in last week’s Marder Report: “A standard breakout entrance above the 68 high of 2/24 would be suitable provided there is some firming in the growth sector overall.”
While the stock did break out Thursday, rising 5% on volume 2% above normal, and it followed through 2% higher on Friday as volume rose to 63% above average, the prerequisite of “some firming in the growth sector overall” has not transpired. We would therefore not have been interested in last week’s breakout entrance.
While FANG is in a cyclical group – oil & gas explorers/producers – this is viewed as a growth stock. The reason is that the technology used may allow FANG to grow earnings at a good pace even during an economic recession.
Matador Resources (MTDR) was noted here in last week’s report: “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.” The comment stands. Similar to FANG above, this is considered a growth stock.
Staar Surgical (STAA) is a thinly-traded issue in the medical products field. With average daily dollar volume of $5.2MM, it may not be for everyone. However, something is clearly going on here, based on three major accumulation days as shown on the below chart. A favorable FDA ruling and researcher Canaccord Genuity raising its rating to Buy from Hold are behind the relative strength seen in the stock.
Price forms a two-week ledge pattern and is worth watching.
U.S. Silica Holdings (SLCA) was discussed in last week’s report: “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.” The comment stands.
In summation, last week saw the Nasdaq Composite and Russell 2000 indices catch up with leading growth stocks to the downside. Pattern setups in the growth sector are fewer than at any time since ’12. A generous cash position is advised for the medium-term speculator in high relative-strength shares.
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