By Kevin Marder
Shares in the Nasdaq Composite, showing scant respect for the concept of gravity, wrapped up the first real pause of their potent four-week rally by powering higher July 20.
In the process, the Nasdaq Composite, an outperformer in 13 of the past 18 sessions, has shown near-perfect price-volume correlation. Prices have risen on generally higher volumes, while easing on mostly lighter activity. This is an objective indication that profit-taking has been minimal on that impressive run.
Chart created using TradeStation.
With breadth, discussed at length in the past two columns, quite solid and amid ample leadership, there is no reason why the market rally cannot continue over the intermediate-term (several weeks to several months). Of course, short-term reactions of 3%-5% should always be expected of any advance. These are viewed as healthy and necessary in order to keep everyone honest.
Within the list, technology /zigman2/quotes/207444675/composite XLK +4.37% and telecommunications /zigman2/quotes/200890842/composite IYZ +2.87% have shown the best tone over the intermediate-term. Among narrow groups, semiconductors /zigman2/quotes/200571902/composite SMH +1.95% excel.
When looking at the top 10 narrow industry groups of the 197 in the O'Neil database, six are of the late-cycle type, i.e. they normally lead late in a bull market amid a mature economy. (Please see the table below.) These include mining, metals and energy segments.
Table created using MarketSmith.
The only bona fide growth group in the Top 10 is telecom — fiber optics , with its 96th percentile rank for relative strength over the past six months. Here, the top actors are Acacia Communications , a recent new issue that nearly doubled in its opening five weeks, and Lumentum Holdings /zigman2/quotes/204419752/composite LITE +0.12% , discussed below.
Acacia, a maker of equipment for cloud-infrastructure operators, is a classic growth stock that reminds one of what was routinely seen in the growth sector of the 1990s: major earnings growth estimates for this year and next, and sizzling revenue growth. Unfortunately, the name does not offer attractive entrance due to it being materially extended above its most recent area of support.
However, intermediate-term players can add it to a watch list for monitoring. Along with Twilio /zigman2/quotes/205796518/composite TWLO +6.50% , another cloud play, it is among the top two or three most compelling of the recent group of initial offerings. Both are watchable, but not actionable.
Among the names, LITE is a top performer in the telecom-fiber optics group, a top-performing industry group. This column has always been about a bottoms-up approach, favoring top actors regardless of their industry group strength. Lumentum is actually an example of top-down analysis, going from market to group to stock.
LITE has recorded triple-digit annually compounded earnings growth over the past three years. Most seers on Wall Street look for the June 2016 fiscal year to come in at 60%, with another 29% expected for the June 2017 year. A weakness is revenue growth. In seven of the past eight quarters, sales have grown at 4% or less. The most recent quarter is an exception, coming in at 16%.
LITE's chart shows a price nearing the top of a three-month double-bottom base. An aggressive speculator may consider using the base top of 27.91 set on April 8 as a potential entrance for a breakout play. Ideally, the stock does nothing for at least several days before a breakout attempt.
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.