It’s interesting to watch the U.S. stock market move higher with precious little in the way of details on how the Trump administration’s investor-friendly initiatives will be funded.
Last week, the administration was given another prime opportunity to provide color on how the country can afford a “big, beautiful tax cut for everyone.” There was no mention of details.
The announcement that military spending would be boosted by $58 billion, though, did come with a mention of gutting the State Department and environmental-protection budgets.
How does that affect the stock market?
The market is pretty smart. If it senses some of these initiatives will be shot down or modified substantially by Congress, it may fall into a correction.
This assumes the sole driver of higher share prices is the administration’s investor-friendly initiatives. That may not be true as the economy continues to purr along, while the slope of the yield curve (the difference between long and short Treasury yields) sits well off its lows of last summer. A steeper yield curve makes it more profitable for banks to lend, equating to increased economic activity.
For speculators, the beauty of the market is that it will figure out all these things for us. The behavior of the major averages and action of the leading stocks will keep technically oriented investors on the right side of the market. This is, at least, half of the whole game.
The view here would turn cautious, if not bearish, upon seeing the leading stocks break down technically on their price charts. This would likely coincide with a number of down days in the averages on higher volume than the previous day (distribution days).
Currently, stocks are largely extended from their most recent bases, or areas of technical support. This always happens after a rally has been in effect for a while. On a positive note, breakout failures have not been many. This is when a stock clears a sideways trading range and then is pressured by sellers who send price back into its base.
A few leading stocks have shown failed breakouts, such as Tesla
These occur when price clears the top of a trading range and sellers emerge to drive the stock back into its base. But this has been more the exception than the rule.
is a member of the data-storage group, ranked in the 95th percentile for relative strength among all segments over the past six months. The company provides backup solutions to individuals and small and medium-sized corporations
One important fundamental trait is Wall Street’s expected earnings growth rate of 25% this year and 29% next. Another is the hefty sales growth over the past two quarters of 50% and 53%, respectively.
Over the past year, CARB’s relative price strength is in the 97th percentile of all stocks. While a value investor might not find this statistic attractive, a momentum player tends to look for names like these that have proven they have what it takes to be a leader. The stock has had a number of higher-volume up days in recent weeks, a plus.
A very aggressive speculator might consider using the Feb. 14 high of $20.45 as a launch point for an entrance. If a half-sized starter position was used, de facto risk is cut in half.
(As always, a protective stop should be used to mitigate risk, along with a starter position that is half, or less, 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, i.e. more than 5% past the top of its base for purchases.)
is a developer of fiber-optics equipment to connect local- and wide-area networks. Most analysts expect 17% earnings growth in the April 2018 fiscal year. This is definitely not a growth stock, as earnings, while positive, have not been consistent.
For medium-term speculation, it makes sense. The stock’s relative strength rank is in the 97th percentile over the past year, while the group RS rank is in the 95th percentile over the past six months. Higher-volume up days have asserted themselves in recent weeks.
Earnings are to be unveiled Thursday. Price is forming a cup-with-handle base of 12 weeks’ length. A possible trigger point for entrance would be the Feb. 14 high of $36.41. However, it is suggested that any entrance be postponed pending the earnings release.
In sum, it remains to be seen how much longer the market will trust the Trump administration to deliver the goods on various initiatives, the most important of which is taxes. We will continue to watch the major averages and individual leaders for clues as to any breakdown of this trust.
— Kevin Marder
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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.