Wednesday, December 28, 2016

Let’s Call This The No-Fault Stock Market

Two reliable long-term signs are showing the market is healthy.

By Kevin Marder
December 29, 2016

I can find few faults with this stock market.

While most growth stocks have fallen out of favor, the averages themselves are stubbornly clinging to recent highs. Volume has dried up, indicating a lack of worrisome profit-taking despite the substantial gains booked in November and December.

Over a longer period, volume and breadth have been solid, which together form one of two reliable long-term signs of health. The other, the financial sector XLF, -1.02% has outperformed the average stock since the summer.

Further upward revaluation is anticipated over the medium term, though a short-term 3% to 5% reaction can always occur in a bull market. The longer-term view here would turn negative if the advance's breadth (the performance of the average stock) were to deteriorate along with the ability of the financials to match new highs by the S&P 500 Index SPX, -0.84%

Growth-stock specialists will find few pattern setups to their liking. This is part and parcel of a bull market that is mature and rotating into value/cyclical names that tend to perform better in a rising-rate environment.

Among the names, most Wall Street analysts who cover Netflix NFLX, -1.92% have the internet-based provider of movies and TV shows earning 32% more this year than it did last year. In 2017, this expected earnings growth rate rises to 134%. Top-line growth remains buoyant and steady, at rates of 24%, 23%, 23%, 23%, 24%, 28%, and 32% over the past seven quarters, respectively.

For the past 16 months, NFLX shares have been forming a long consolidation. The past year has seen this take the form of an O'Neil cup-with-handle basing pattern. The entrance pivot, or point of least resistance, is the $129.29 top of the handle.

Aggressive speculators could use a break of this level for entrance. At the time of the breakout, volume would need to be on track to finish the day at least 40% above NFLX's 8.8 million-share average.

If this breakout occurs Thursday or Friday, thinner-than-usual holiday trading conditions may not produce the brisk volume that is needed to lift the chance of a successful move.

As always, a protective stop should be used to mitigate risk, along with a starter position that is half, or less, the normal size. This initial position could be added to if the stock proves itself. In most cases, a position should not be entered when price is extended — more than 5% past the top of its base for purchases.

Blackline BL, +0.26% is a recent new issue in the enterprise-software segment of finance and accounting. This is a very speculative company due to its losses in the past three years — plus Wall Street’s outlook for more of the same in 2016 and 2017.

In younger, unprofitable companies such as Blackline, it can be helpful to look at recent revenue growth, especially sequential growth. With BL, the last three quarters have featured sales growth of 47%, 49%, and 49%, respectively.

Sequential revenue growth is a more sensitive metric and measures growth in one quarter vs. the prior quarter, not vs. its year-ago quarter. A sequential growth rate for revenue of 10% is deemed impressive. For Blackline, the last three quarters have run at 8.6%, 9%, and 11%.

The stock jumped as much as 51% in its first day of trading as a public company nine weeks ago. Recent new issues that can climb 50%-plus in their first two months of trading are accorded special attention. It is these titles that have a higher likelihood of eventually becoming outstanding actors.

Technically, BL has been tracking sideways for the past five weeks while holding on to the bulk of its prior gains. Aggressive speculators may consider using the 28.77 high of Nov. 29 as an entrance pivot for a breakout play.

Tesaro TSRO, -1.32% came public at $14 in mid-2012. Despite dripping red ink during the past four years, investors have bid shares of the developer of cancer treatments to a recent high of $148.74.

With more losses expected by the Street for this year and next, and with inconsistent revenue growth, TSRO represents a higher-risk play.

Tesaro's chart looks constructive. At present, price is building a six-week flat base. The are two entry points: A cheater entrance could be used on a takeout of the Dec. 6 high of $143. A less aggressive pivot would be the $148.74 high of Nov. 14. A break of this latter high should be accompanied by volume at least 50% more than the daily average of 1 million shares.

In sum, a market that has climbed appreciably since just before the election has left few pattern setups for the intermediate-term speculator, especially within the growth segment. The averages are in good shape, as are volume, breadth, and the financial sector. Notwithstanding a 3% to 5% short-term reaction that can always occur in a bull market, the intermediate-term direction stays up.

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