The major indexes looked poised to end October on a frighteningly good note, led once again by the tech-dominated Nasdaq composite.
XAutoplay: On | OffAt 3:15 p.m., the Nasdaq composite held on to decent gains Tuesday, up 0.5% in late afternoon trading; it traded as high as 6,729 intraday, good for a 3.6% lift for the month.
Alphabet (GOOGL) certainly helped the cause, rising as much as 9.2% in October with the help of a post-earnings blast higher on Friday. On Tuesday, shares wiped away a small intraday loss and are up fractionally to 1,034.42 in thin volume. The Google search engine operator, which makes up nearly 6% of the total market value of the Nasdaq, is now up 2.5% from a new 1,006.29 buy point in a well-formed flat base and thus still in buy range.
The proper buy zone, based on IBD’s time-tested buy rules, goes up to 1,056.60.
IBD’s proprietary ratings in Alphabet have improved markedly since Jan. 1. At that time, IBD Stock Checkup showed Alphabet sporting a mediocre 76 Composite Rating, a 93 EPS, and a lowly 45 for Relative Price Strength. Today, those rankings are now at 97, 94 and 77.
The S&P 500 and the Dow Jones industrial average continued lagging the Nasdaq, up between 0.1% and 0.2%. At 2577, the S&P 500 is up 2.2% for the month.
At 23,400, the Dow shows a 4.4% month-to-date gain, but still lags the Nasdaq since a rare Day 3 follow-through that was noted in the June 30, 2016, edition of IBD’s The Big Picture. That follow-through noted a possible tradeable market rally getting underway.
The Nasdaq has risen 39% since the close of the June 30 session, vs. a 30.5% advance by the Dow industrials over the same time frame.
Small caps outperformed after selling off hard on Monday; the S&P SmallCap 600 rallied more than 1%.
Volume on the NYSE and Nasdaq was running mildly lower vs. the same time Monday. Winners are beating losers on the NYSE by a nearly 2-1 ratio.
The consumer electronics and digital services giant, which is seeing strong orders and good media reviews for the iPhone X, is now also up nearly 43% since surpassing the first base that it completed in early January 2017, a 13-week cup with handle that sported a 118.12 buy point.
Apple had been featured numerous times in Stock Market Today reports from October through that Jan. 6-9 breakout.
As noted in Stock Market Today on Monday, Apple stands to gain from an ongoing turnaround in both the top and bottom lines.
Back to Apple, earnings had dropped 10% in the fiscal year ended in September 2016, on an 8% slump in revenue. However, Apple has been staging a classic turnaround in fundamentals lately.
In the past three quarters, the iMac maker’s earnings rose 2%, 11% and 18% vs. year-ago levels, following a three-quarter slump. And in Q4 (ended in September), earnings are seen increasing 12% to $1.87 a share, which would mark a third quarter in a row of mild double-digit gains. It’s slated to report Q4 results on Nov. 2 after the market close.
For fiscal year 2019, the Street sees earnings accelerating 24% to $11.16 a share.
Another positive for Apple shareholders: a respectable annualized dividend yield of 1.5%, with plenty of potential for further increases in that cash payout. Apple tends to raise its dividend in the spring. But William O’Neil + Co. calculates that the company has a long-term annual dividend growth rate of 24% in recent years.
5 Positive Factors For Alphabet
Going back to Alphabet, institutions are clearly deploying more capital into the megacap internet-based entertainment and advertising play. Among three fundamental reasons, one is the fact that EPS growth is back on an accelerating path.
Earnings per share jumped 32% to $9.57 a share, pounding the Wall Street consensus view by nearly 15%. It was the biggest year-over-year increase in five quarters and marked a faster rate of increase vs. gains of 7%, 28% and 27% in the prior three quarters.
Two, Alphabet is showing stronger profit margins, which may indicate that the company’s tighter control on expenses over the past few years may be paying off. Net margin in Q3 hit 24.2%, up 170 basis points vs. a year ago and the highest since a 25.3% level seen in the first quarter of 2013.
Three, revenue growth has seen a mildly faster pace.
From the fourth quarter of 2014 to the first quarter of 2016, the top line saw increases of 11% to 18%. But since Q2 of 2016, the top line has grown 21%, 20%, 22%, 22%, 21% and 24% vs. year-previous levels.
Two more reasons why Alphabet could rally another 20% to 25%:
One, fund sponsorship may be stabilizing. Mutual and hedge funds owning Alphabet fell to 4,350 funds in Q3 vs. 4,408 in Q2, but the total shares owned was unchanged at 131.6 million. That total represents less than 19% of 694 million total shares outstanding.
Two, some top-rated funds have increased their stake, including Fidelity OTC Portfolio (FOCPX) and Fidelity Magellan (FMAGX) in the second quarter, according to data from William O’Neil + Co.
IBD research has found that many top-rated companies have the potential to rally 20% to 25% past a proper buy point before undergoing a new pullback or significant correction in price. On Jan. 6 this year, Alphabet propelled out of a shallow cup-with-handle base at 824.40 and rose 22% before peaking near 1,008 on June 6.
A New Apparel Leader?
While sports-apparel firm Under Armour (UAA) dropped more than 18% in massive volume and commanded the negative headlines after posting disappointing Q3 results (EPS down 24%, sales off 4% to $1.41 billion), not all apparel firms are wilting.
Despite a negative reversal on Tuesday, Canada Goose (GOOS) has been building the right side of a new cup-type base. For now, watch to see how the small-cap stock handles upside resistance near 22. At 21.43, Canada Goose is still trading nearly 12% off its all-time peak of 24.32.
The ultrapremium outerwear and cold-weather knitwear marketer went public at 12.75 a share on March 16. The stock quickly goosed up a 31% gain after a late-May breakout past an 18.50 IPO base, then peaked at 24.32.
The current base shows a normal decline of 30%, within the normal range for a solid cup with handle.
Keep in mind that Canada Goose’s business is highly cyclical, with the bulk of its sales and profits coming during the holiday quarter. That said, the luxury-brand play looks set to go well into the black in fiscal year 2018 (ending in March next year) as analysts on consensus see profit of 43 cents, then 54 cents in FY 2019, up 26%.
Sales grew 39% to $404 million in FY 2017 (ended in March), notching a third year in a row of 30%-plus gains.
On Canada Goose’s e-commerce site, a women’s red Canada Coat full-length parka currently sells at $1,695.00. Many other women’s parkas range from $795.00 to $1,295.00 each.
Under Armour, meanwhile, had posted a shocking first year-over-year top-line decline in at least four years. The closing of numerous brick and mortar chain stores and stiff competition from the likes of Nike, Adidas and other athletic brands has dented its business model of being virtually ubiquitous in the retail landscape.
The right time to have sold the stock was when it failed to complete a new base in the summer of 2016. That base featured a left-side high of 47.94. On the right side, Under Armour got as high as 44.68 before reversing sharply lower.
The stock then cracked on Aug. 31, falling nearly 5% to 39.63 and taking out both its 50-day and 200-day moving averages in heavy turnover.
Construction Stocks Build Gains
Elsewhere in the market today, building and construction stocks rallied sharply.
Decking products expert Trex (TREX) gapped up more than 24% to 108.79 and reached as high as 112.39, stretching its gain from an August breakout past 76.59 in an elongated double-bottom base to more than 46%. The stock headed the upside of IBD’s “Stocks On The Move” table, which is a great hunting ground for snagging breakouts and building a good watch list.
Trex reported robust Q3 results (EPS up 42% to 68 cents a share, revenue up 32% to $140.2 million, the strongest increase since Q3 2014). Analysts are forecasting mild double-digit profit growth for full-year 2017 (up 17% to $2.99 a share) and 2018 (up 14% to $3.41).
Thinly traded William Lyon Homes (WLH) cleared resistance near 25 and rolled past a 25.28 flat-base buy point, rising nearly 9% to 27.18. Volume is running nearly triple its average pace. The buy zone goes up to 26.54. The Newport Beach, Calif., single-family homebuilder posted a 109% leap in Q3 earnings to 71 cents a share on a 43% jump in revenue to $490.3 million.
William Lyon trades on average 394,000 shares a day, roughly equivalent to $11 million in trading volume. That’s thin, but Lyon also gets a respectable 91 Composite Rating from Stock Checkup, and that rating is likely to climb.
IBD’s TAKE: Using stock charts correctly can help you time your purchases in leading stocks so that you can maximize your gains and minimize losses within a relatively short period of time. Watching for breakouts from key chart patterns during earnings season is especially helpful. In addition to the flat base and the saucer base, the cup with handle stands out as one of the most critical patterns of human psychology; it visualizes investor fear and greed, hope and denial. Learn more about the cup with handle in this Investor’s Corner column so you can gain an extra edge on Wall Street.
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