By Kevin Marder
The Trump Rally continues.
And with it moves the posse of issues that are set to benefit the most from perceptions for a loosening of regulation, a cut in taxes, and a bump in fiscal spending. This means financial in general, and banks and brokers in particular; transportation; and industrial.
On the other side of the coin, the S&P 500's four defensive sectors — consumer staples /zigman2/quotes/200697959/composite XLP -0.31% , utilities /zigman2/quotes/206645117/composite XLU -0.25% , health care /zigman2/quotes/205918244/composite XLV -0.76% and telecommunications /zigman2/quotes/200890842/composite IYZ -1.18% — are underperforming the S&P 500 /zigman2/quotes/210599714/realtime SPX -1.57% , a significant plus pointing to a healthy amount of speculative sentiment. It is the speculative sentiment, or the willingness to take on risk, that is so crucial to the durability of an advance.
The breadth of the move impresses when looking at the new-high data. For example, the number of 52-week Nasdaq highs reached 446 on Nov. 14, the most in a number of years. This is a sign of overwhelming participation in the Nasdaq advance. This leadership is coming more from small-capitalization issues /zigman2/quotes/209961116/composite IWM -1.14% and less from large names found in the Nasdaq 100.
Overall, shares have moved into the most positive period of the year, historically. Given the mostly straight-up move to a new high over the past fortnight, the Nasdaq Composite can be expected to pull back in order to digest its gains.
Chart created using TradeStation . ©TradeStation Technologies, 2001-2016. All rights reserved.
However, overbought can sometimes stay overbought, especially after a decline. For this reason, speculators should maintain an open-minded, flexible approach with no preconceived ideas of where the market will go short term.
Meanwhile, the Wall Street Journal reports that, according to Lipper, investors placed more money into stock ETFs during the week following the election than any other week in history. The view here is that this should be interpreted bullishly, and not as an indication of a speculative blow-off.
Among the names, Baozun /zigman2/quotes/200727380/composite BZUN -0.71% uses its e-commerce supply-chain technology and services to connect brands and consumers. Most analysts on Wall Street who follow the Chinese concern look for earnings growth to be 108% in 2016 and 170% in 2017.
After going public 18 months ago at 10.00 and subsequently moving up close to 50% in the first two weeks post-IPO, BZUN dropped to as low as 4.00 during an extended consolidation. It is currently six weeks into a new cup-shaped pattern. At a depth of 32%, it is considered deep for a base of just six weeks' duration, as the chart below shows.
For this reason, and because the stock is teen-priced, it would be preferable to see price spend more time backing and filling before trying to take out the Nov. 15 high of 16.92. A cheater entrance could be taken using 16.92 as a pivot, but the depth of the base and the liquidity of the issue augur for a more patient approach. (Regarding liquidity, the average daily dollar volume is about $8.3 million, while the market capitalization is about $791 million.)
A preferred approach would be to wait for BZUN to round out its base before considering an entrance. In any case, a reduced-size starter position is appropriate here.
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. In most cases, a position should not be entered when price is extended, i.e. more than 5% past the top of its base.