A long time ago, in a galaxy far, far, away I spent a great deal of my time on basketball courts. I played other sports but basketball was great because of the quick transition from offense to defense. In the blink of an eye you go from attacking the basket to defending the paint. The stock market reminds me a lot of my playing days. At the drop of a hat we can go from rally mode to hunkering down in cash on the sidelines.
Offense or Defense?
The playbook for offense in the market is very different from defense. The offensive playbook is buying the dips, looking for high beta stocks in aggressive growth industries. When the market is on defense you look to take your profits, keep tight stop losses, raise cash and buy low beta dividend paying value names.
My favorite part about being a technical analysis guy is I don’t have to speculate about whether or not the market is going to head higher or lower. I listen to market and let it tell me what it’s doing right now. Tomorrow could be a total different story and I’ll worry about that tomorrow. Right now my unbiased mathematical indicators say the market has been going up. My assessment is so painfully simplistic it’s almost embarrassing. But I’ve always been a fan of the K.I.S.S. method. Draw the SP 500 with weekly bars, the 25×5 SMA and fast stochastics. If the SP 500 is above the SMA we are on offense, if it’s below then we are on defense. The 25×5 SMA on the weekly is down at 1750 right now, so as long as we are above that we are on offense. As an aside, the week of the recent sell off the 25×5 was at 1735, a level we stayed above.
When I think high beta and growth I think about tech. And what could be more high tech than tiny little microchips? The semiconductor industry as a whole has struggled a bit with a Zacks Industry Rank in the bottom 31%. But I’m not concerned with the losers of the group, I’m here to find us a couple of winners. Integrated Device Technology (IDTI) manufactures semiconductor products for telecommunications equipment. Think routers, hubs, switches, all things networking. The magnitude of estimate revisions is what makes this a Zacks Rank #1 (Strong Buy). Consensus for the current year has risen from 29 to 38 cents per share in the last 30 days. Next year’s estimates are also up from 48 to 61 cents.
A glance at the chart tugs out the visceral reaction of “Where were you three weeks ago Dave?” The stock has broken out to new highs and currently trades near $13, well above the previous double top at $11.25. Sometimes you just have to watch the pretty bird fly away and hope it comes back. Given the high beta nature of the stock patience should be rewarding. I like the fact that we are trading well above the 25×5, but given the fact that we just broke out with no real pull back I think downside risk in the short term is considerable.
Looking for Zacks Rank #1 (Strong Buy) and #2 (Buy) stocks is part of the equation. When comparing stocks of equal rank I like to look at where the Zacks Rank was last week. Stocks moving up the ranks can tip me off to an improving earnings outlook. Formfactor Inc (FORM) just got bumped up to a Zacks Rank #2 (Buy) this week. Formfactor designs high performance semiconductor wafer probe cards used for test applications. Recent earnings estimate revisions have the company inching closer and closer to profitability in the next year.
The technical picture is a bit less mature than IDTI. Here we have a stock that has made a pretty aggressive run from $5 to the $7 level it sits just below today. Last week we broke above the 25×5 SMA, pulled back to it and found strength. Here you have a favorable risk versus reward scenario with the SMA at $6.52, just a few percentage points below the current price. The July high near $7.75 is a logical price target and gives lots of potential for a breakout from there.
We’ve found two stocks appropriate for our all-out offensive on the market. But both of the previous stocks are one dimensional players. One is actually making money and the other has a favorable chart. Now we have to find one that makes money and has a favorable technical chart. I think I found a winner in Himax Technologies (HIMX). Himax is a Zacks Rank #2 (Buy) thanks to 3 analysts raising estimates for this year, helping push consensus to 63 cents per share from 58. The company’s products are display drivers for large TFT-LCD panels used in desktop monitors, notebook computers and televisions.
For the chart I reached into my bag of goodies and pulled out my old friend the Fibonacci Retracement. The stock has made a huge run from support at $5 in June 2013 all the way to a high of $15.29. The 23.6% retracement level at $12.88 was textbook support. The stock sits just below its 25×5 SMA in prime position to break higher with stochastics in oversold territory and just completed a bullish cross. You could put a tight stop loss near $12.75 and have a very favorable risk versus reward.
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