If Donald Trump goes down, don’t expect stocks to go down with him.
Market participants should not view Trump’s buoyancy or lack thereof as the big bugaboo. Most understand that any takedown of the president, whether by impeachment, Amendment 25, or resignation, would result in a Pence presidency. He is extremely conservative, more so than any president in modern times, including Ronald Reagan. He could be expected to continue much of what Trump has begun. “Trump without the drama,” as one politician put it.
No, the real bugaboo at this stage is the narrowness of this rally. This is not evident by looking at the favored measure of breadth, the New York Stock Exchange cumulative advance-decline line. The chart below shows a market “in gear,” i.e. a large-stock average (the S&P 500 SPX, -0.06% ) is moving higher in tandem with a proxy for the average stock, the NYSE A-D line.
But the narrowness is there. It is there in the form of mega-capitalization growth issues, often referred to here as liquid glamours, and mostly technology shares, exerting an undue influence on most major averages.
These include Apple AAPL, +0.48% Netflix NFLX, +0.74% Amazon.com AMZN, +0.40% Facebook FB, +0.09% Alibaba BABA, -0.10% Alphabet GOOGL, +0.09% AdobeSystems ADBE, +0.20% Tesla TSLA, +2.77% and Salesforce.com CRM, +0.10% which make up a disproportionate share of most major averages.
On the bright side, the willingness of institutions to accumulate these stocks week in and week out says something about the speculative sentiment of this market. While a certain amount of risk-taking behavior is part and parcel of any bull market, one led by quality growth titles like these with superb earnings prospects and that are leaders in their industry defines healthy leadership.
Lately there has been some hand-wringing about valuations generally. As a technically-oriented speculator, the price-volume behavior of the averages and action of the leading stocks is more important than one’s opinion of where the market “should” be based on valuation or sentiment measures. Clearly, the averages and leaders act well, end of story.
While the leaders show a good tape, nearly all are technically extended above their most recent support areas. For the breakout player, this should signal caution as to fresh-money buys.
Among individual names, speculators can monitor Tesla TSLA, +2.77% While the stock could be buyable above the top of the four-week shelf pattern it is forming (see chart below), the cautionary approach favors letting the stock put in more time in base-building (consolidation) mode.
One feather in Tesla’s cap is that it just cleared the top of a large, three-year-plus consolidation, as shown on the weekly chart below. The bigger the base, the farther they race, as the saying goes.
Wix.com offers a Web-centric service that enables users to develop their own sites. The reason why the stock went up four times in the last year is due to its expected earnings growth for this year and next. Most Wall Street analysts eye an improvement from 2016’s loss of 35 cents a share to a 36-cent-a-share profit this year and further growth of 186% to $1.03 in 2018.
While growth of this nature is impressive, equally noteworthy is the revenue figures in recent quarters. They show 41%-50% sales growth in the last four quarterly periods. This adds to the integrity of WIX’s forecasted earnings growth.
Due to the suggested level of overall caution, just as with Tesla, speculators should monitor Wix and allow it to put in more time consolidating sideways. A more aggressive player may be inclined to use the May 10 high as a cheater pivot ahead of a formal breakout of its current four-week shelf pattern.
There are few companies in the market that can boast a revenue and expected earnings picture like Wix. Speculators should have this on their watch list.
To sum up, the market’s weakness, if it has one, is the concentration of investor monies in one corner of the market: mega-sized growth stocks, particularly technology. Mr. Trump’s legal woes should be viewed as much less important longer term.
The lesson learned from the 1990s was that markets can go a lot further than most can imagine, despite a rising cacophony of warnings about the generous valuation of the market.
However, the point here is not to get ahead of ourselves and predict when this market will top. Rather, it is to keep an open mind as to what is possible, all the while staying flexible as to new technical developments as they occur.
While opinions are often wrong, the market usually isn’t.
For intraday market comments and stock ideas: https://twitter.com/mardermarket Earnings estimate data provided by Thomson Reuters.
The views contained herein represent those of Marder Investment Advisors Corp. (“MIAC”). At the time of this writing, of the stocks mentioned in this report, Kevin Marder and/or MIAC held no positions, though positions are subject to change at any time and without notice. Neither MIAC nor any of its affiliates will be liable, and we accept no liability whatsoever, for any losses any recipient of this report may suffer as a result of his or her or its use of this report or any of its contents.