By Kevin Marder
While the sharpness of the three-day rally has caught some by surprise, the market is simply doing what it had wanted to do all along pre-Brexit: move higher.
The advance has featured gap openings, excellent closes and above-average volume. The latter has approximated the activity during the first three days up off the Feb. 11 bottom.
Chart created using TradeStation . ©TradeStation Technologies, 2001-2016. All rights reserved.
The two things that tainted the February-April rise were subpar volume, which suggested a tentativeness on the part of market participants, and a lack of growth-stock leadership. Trading volume appears to have returned in force, while more growth stocks appear to be readying a run for the roses.
The real leadership, however, is among defensive sectors such as consumer staples, utilities, and telecommunications. This speaks to a certain sense of caution among participants. It is classic leadership late in a bull cycle.
There is precedent for an extended period of defensive-stock leadership. After the Black Monday crash of October 1987, defensive groups like food, beverage, tobacco, household products, and drugs began a period of leadership that lasted through all of 1988 and 1989, and well into 1990.
(Earnings-growth rates were higher back then. Most drug companies were expanding earnings by 16%-20% per annum, and even staid Coca-Cola was booking mid-teens growth. Portfolio managers tasked with a growth mandate had it much easier then.)
Among the names, TAL Education Group was discussed in the last column. " Aggressive speculators might consider the May 25 high of 58.99 ... as a pivot for a cheater entrance ahead of the formal 60.44 base top ." Thursday, the stock cleared the top of the base on volume 94% above average, just the type of conviction one would like to see.
XRS is still potentially buyable around Thursday's closing level of 62.06, which would represent about 5% risk when 58.99 is used as a protective stop. Entering a position that is 5% beyond its buy point is considered borderline extended. It could be reduced by one-half by taking a half-sized normal starter position.
As always, a protective stop should be used to mitigate risk, along with a starter position that is half normal size, or less. This initial position could be added to if the stock proves itself.
Chart created using MarketSmith . ©2016 MarketSmith Incorporated. All rights reserved.
Supernus Pharmaceuticals /zigman2/quotes/203126024/composite SUPN +1.47% develops specialty treatments for epilepsy and attention-deficit hyperactivity disorder. Unlike many biotech concerns without earnings due to their development-stage status, Wall Street expects Supernus to grow earnings by 121% this year and 132% next.
Revenue growth has been 39% and 53% for the last two quarters, respectively.