• Kaiser L

US Stock Market Hits All-Time Highs

Back again for the weekly updates of my views of the market. Pretty much everything is moving higher at this point with broad market participation this week. We are seeing an increasing number of stocks making 52-weeks highs, which is indicative of broad market participation. Furthermore, % of stocks above 20-DMA is entering into the overbought zone (Fig 1), and we see very low levels of put/call ratio based on the NYSE composite (Fig 2). We are entering into the next stage of a bull market rally as we enter into all-time highs on all fronts (Fig 3). This could either be the new normal for a while or market exuberance. But I express caution for myself and others not to be carried away by greed. Paper profits are only profits when they are in cash.

Fig 1: 83.5% of S&P 600 stocks are above 20-Day Moving Average ("Overbought" Zone)
Fig 2: Influx of option calls, which put/call ratio currently stands at 0.39
Fig 3: Retail investors and traders are entering into FOMO mode

As we see in the $SPY, we are currently at all-time highs. All moving averages are trending upwards with the price holding above the 10EMA and 20DMA (Fig 4).

Fig 4: $SPY hitting all-time highs

The $IWM is also at all-time highs after a 5-day consolidation. On Friday, it broke out on heavier volume, which is constructive. Small caps led the charge as the broader market advance on Friday with indexes making all-time highs (Fig 5).

Fig 5: Small caps are leading the market to all-time highs with increased volume accumulation in $IWM

However, the $QQQ lags on Friday, advance only 0.41% (Fig 6). Despite the lag among large-cap tech stocks especially, smaller tech growth stocks should still benefit from the $IWM. One word of caution, the $QQQ has been rallying higher for ~7 trading days already. There is a possibility of a pullback in the short-term, but I would say that all dips are buyable until proven otherwise.

Fig 6: $QQQ is hitting all-time highs on lower volume due to lack of participation among large caps

Overall, the level of exuberance in the market is rising as market breadth enters the “overbought” zone. In the short term, we could see pullbacks to retest the breakout, shakeout those dumb money, and cool market sentiments. Hence, I will be looking to scale partial profits from positions that are going parabolic so that cash can be re-deployed into new positions on any market pullbacks.

Industry Outlooks

When we zoom down into individual sectors, the main highlight is the semiconductor industry this week. $SMH is heating up rapidly as it rallies 6.28% this week. This rally is supported by heavy volume accumulation in the past week as it reaches all-time highs (Fig 7) At this point, I find it difficult to chase. Instead, I will be focused on finding the leading semiconductor stocks and wait for a pullback instead. Based on my preliminary readings of some of the companies' earning transcripts, production ramp-ups and demand are expected to continue into 2021 due to factors such as 5G deployment. Furthermore, we are also seeing significant revenue and earnings growth, coupled with bullish guidance. Semiconductor companies that I am looking to increase portfolio exposure on pullbacks include $AMD, $COHU, $QRVO, $QCOM and $UCTT.

Fig 7: $SMH rallied 6.28% this week on increased volume accumulation

Another interesting sector is energy ($XLE). We have been seeing heavy volume accumulation since 9 November, with faster moving averages (5EMA and 10EMA) trending above the 200DMA. Furthermore, the 50DMA is starting to turn upwards and looking to cross the 200DMA in the coming weeks (Fig 8). At the moment, I would be using short-dated options to capitalize on the price momentum within the sector. Hence, these trades would be limited to short-term swing trades only. Today, I also came across an interesting blog post on energy by ZenTrend, which I would recommend.

Fig 8: Accelerating price momentum and increased volume accumulation since early November

Top Earnings Release this Week

Lastly, as we slowly come to the end of earnings season, there are a couple of earning releases in the past few days that captured my attention.

1. DocuSign (DOCU) – ADDED

  • Subscription revenue was up 54% to $366.6M. Professional services sales increased by 43% to $16.3M. Billings were up 63% to $440.4M (consensus: $379.6M)

  • For the current quarter, DocuSign guides revenue of $404-408M (consensus: $387.4M) with subscription revenue of $384-388M. DOCU expects billings of $512-522M and non-GAAP gross margin of 78-80%.

  • For the year, DOCU sees $1.426-1.43B (consensus: $1.38B) in revenue, $1.355-1.359B in subscription sales, billings of $1.7-1.71B, and non-GAAP gross margin of 78-80%.

  • Cathie Wood (Arkk Invest) has been increasing exposure to DocuSign recently (Fig 9) (Note: One of the best fund managers who have produced consistent results. Highly recommend to follow Arkk Invest for new trade ideas)

Fig 9: As of 2 Dec 2020, DOCU is the 29th largest position across all Ark funds

2. CrowdStrike (CRWD) – ADDED

  • Revenue of $232.46M, up 85.8% Y/Y

  • Q3 Non-GAAP EPS of $0.08, up 214% Y/Y (8 quarters of earnings acceleration)

  • Q4 2021 guidance – Total revenue of $245.5-250.5M; Adj. EPS of $0.08-0.09

  • FY 2021 guidance – Total revenue of $855-860M; Adj. EPS of $0.21-0.22.

3. Zscaler (ZS) – ADDED

  • Revenues jumped 52% to $142.6M ( 4 quarters of revenue growth acceleration)

  • Non-GAAP EPS of 0.14, up 367% Y/Y

  • Q2 2021 guidance – revenues of $146M-$148M (above consensus for $140.3M) and EPS of $0.07-$0.08 (vs. consensus for $0.07).

  • FY 2021 guidance – revenues at $608M-$612M (well above expectations for $588.4M), calculated billings of $755M-$765M, and EPS of $0.37-$0.38 ( well above consensus for $0.31)

  • One of three best cybersecurity plays in the industry group, alongside CrowdStrike and Okta

*Disclosure: Earnings are obtained from Seeking Alpha

All 3 have broken out of multi-month consolidation on >3X volume. Low-risk entry is to either wait for a possible retest of gap-up or wait for a pullback to faster moving averages. However, given the strong market condition currently, strong leadership stocks that have gapped up could also continue higher right away. These are just my take on the market. They are not meant to be recommendations. Please do your due diligence and trade wisely.

Have a nice weekend ahead.