Major indexes felt investors’ chill over news that Gary Cohn is leaving his White House role as chief economic advisor, but the Nasdaq composite continues to prove that it is the index to beat in 2018. However, as seen in recent sessions, the U.S. equity markets continue to show rapid seesawing action as well.
Due to a recent spate of heavy distribution, or pronounced institutional profit-taking, from Feb. 20 to March 1 in both the Nasdaq and the S&P 500, IBD’s current outlook continues to stand at “Uptrend under pressure.”
At 3 p.m. ET, the Nasdaq shaved its mild losses and is trying to hold above the breakeven level, up 0.1%, despite having multiple large-cap and megacap companies that do business overseas. But in the wake of continued uncertainty over the possibility of trade spats between the U.S. and China, the rest of Asia, and Europe, clearly the selling has been more focused on industrial companies.
The Dow Jones industrial average, down at one point 1.4%, has cut its losses to around 0.7%. During session lows, at least half of the 30 components sank 1 point or more. IBM (IBM) was the sole stock within the Dow Industrials to rise 1 point or more.
The S&P 500 slid nearly 0.8%, then cut the loss to less than 0.4% with an hour to go in Wednesday’s session. At 2707, the large-cap benchmark has shaved its year-to-date gain to 1.6%.
The Nasdaq is up 6.7% since Jan. 1.
The Russell 2000 gained 0.7% as small caps outperformed. Perhaps institutional investors hold a general view that a budding trade war that focuses on tariffs on select products would hurt larger multinational companies more than smaller firms that sell primarily in the domestic market.
The S&P SmallCap 600 is up 0.6%, and at 955 is now up 2% since Jan. 1.
While steel stocks are emerging as a new leading sector thanks to strong gains by the likes of United States Steel (X), Steel Dynamics (STLD) and Nucor (NUE), the software, consumer and China sectors of the market continue to do well.
Alibaba (BABA), Weibo (WB) and TAL Education (TAL) continue to show nice long-term uptrends and high relative strength. (See a detailed analysis of TAL’s chart action near the bottom of this article.)
Alibaba, a big winner in 2017, continues to a long trend of higher highs and higher lows. Notice on a daily chart how the Chinese and international facilitator of e-commerce and mobile payments had sold off in line with the early February correction that took the Nasdaq down nearly 12% from its perch. Yet Alibaba, hitting a 2018 year-to-date low of 168.88, did not undercut the Dec. 5 near-term low of 164.25. That’s bullish.
Plus, Alibaba has been weaving above and below its still-rising 50-day moving average. Such action indicates that the stock is trying to form a new base that could serve as a launching pad for a new breakout and a new run to price highs.
When a stock breaks out and hits new highs, everyone in the market is happy, except for short sellers.
Alibaba broke out of an eight-week cup with handle at 192.59 on Jan. 24, rallied 7%, then got reeled back into the belly of that chart pattern. So, a new base that potentially forms would technically serve as a base next to a base.
Autodesk (ADSK) gapped up on very strong results and gave a rosy outlook based on success with its transition into a “software as a service” business model. Adobe Systems (ADBE) has already shown it’s succeeded by selling its products online and giving users flexible subscription-based offerings.
Both Autodesk and Adobe are members of IBD Leaderboard, which currently shows nine names on its Leaders list. Each of those Leaders has an annotated daily and weekly chart to help users find the right time to buy and the best time to sell to lock in gains and minimize losses.
Autodesk jumped past a 131.20 buy point in a three-month base that can be viewed as a double bottom. Last week, the stock briefly surpassed the 119.34 entry in the double bottom. Add 10 cents to the middle peak between the two lows to locate the traditional buy point.
Autodesk’s sales grew 16% to $553.8 million, posting its best top-line results in more than four years.
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In the stock market today, industry groups bucking the market sell-off include cosmetics and personal care, long term medical care, educational software, fiber optics telecom and enterprise software, all up 1% or more.
Going back to leading China ADRs, TAL is a perfect example of a company that would appear to be impacted far less from U.S. tariffs on select commodities than other compatriot companies. The leader in for-profit education for China’s fast-growing middle class inched up on Wednesday, but more importantly, the large-cap consumer spending play continues to hold near a 36.26 buy point in a new four-month cuplike base.
TAL, which has a relatively limited float of 182 million shares, has performed exceptionally well since it initially cleared a 12-week perfect cup with handle at 13.07 on Jan. 19, 2017 (adjusted for a 6-1 stock split later in the year). On that day, the stock vaulted 7.4% in very heavy volume and sprinted past the highest price within the downward-slanting handle within the base. Add 10 cents to a handle’s high to find the exact buy point.
To see that exact breakout, MarketSmith offers excellent easy-to-use historical charts that allow users to go back decades in time.
On the day of TAL’s January 2017 breakout, the correct buy point was 77.93, a dime above the handle’s high, before the big stock split. In the handle portion of the base, TAL fell just 5% to 74.06. The handle indicates the final shakeout of remaining uncommitted shareholders before fresh new institutional demand comes in to lift the stock and spur the breakout to new highs.
Since that breakout, TAL has advanced 200%.
Over the same time period, the S&P 500 has gained as much as 27%, excluding dividends.
TAL grew its revenue 39%, 38%, 43% and 68% over the past four years. In the fiscal year 2017 ended in February that year, the top line was $1.04 billion, hitting the billion-dollar level for the first time.
The Street sees earnings rising 14% to 32 cents a share in FY 2018 (which just ended in February), then leaping another 62% to 52 cents in FY 2019 on revenue increases of 63% to $1.7 billion and 52% to $2.59 billion, respectively.
In other financial markets, WTI crude oil futures slumped 2.3% to $61.14 a barrel despite reports that weekly U.S. crude oil inventories came in higher than expected at 2.4 million barrels, suggesting continued strong domestic output. In the prior week, inventories were higher at 3.0 million barrels.
Bond traders have been conducting relatively quiet trading, at least from the view of U.S. Treasury long bonds. The yield on the benchmark 10-year note stood at 2.88%, relatively unchanged for the past two sessions and seven basis points below the year-to-date peak of 2.95%.
The CME Fed Watch tool for analyzing fed funds futures currently shows no significant change in the probability that the Federal Reserve will raise short-term interest rates four times by December. The probability that the fed funds rate will hit a 2.25%-2.5% target range is 34%. This means the majority of bond traders see just three increases of a quarter point each for 2018, with the first one coming up after the Fed holds a two-day meeting on interest rate policy on March 20-21.
(Please follow Saito-Chung on Twitter at @IBD_DChung for more commentary on top growth stocks, breakouts, sell signals, and other financial markets.)