January 2020 Trend-Following Market Update (Part 4):

Finally, the market cracks. After weeks of higher prices we finally saw selling in the major stock indexes, and on some major headline risk too. So in this weekend update, let’s review that price action to see whether it’s a one-off thing or the start of a more serious pullback. I also have one potential trade idea that’s bucking the bearishness.

Plus…

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So as I was saying, after a strong start to January 2020, the market’s finally pulling back a little bit. Let’s start by taking a closer look at the major market indexes to give you some context.

January 2020 Market Update (Part 4):

As you probably know, markets have been pretty bullish this year. So a normal pullback from all-time highs isn’t to be unexpected. Because while there are lots of headline risks out there right now: the Corona Virus and Impeachment Trial for example, the market didn’t care about these unknown until now.

So as a trend follower: I prefer to just observe and react, rather than trying to predict the market’s next move. Thus looking ahead to next week, I’ll be curious to see if we get a more sustained pullback, or a quick bounce back higher.

Given the selling really kicked off Friday, I’d personally expect we could see a little more of a pause. Because as you can see on the weekly chart of SPY below, the weekly decline is just a little blip:

January 2020 Trend-Following Market Update and Trade Ideas (Part 4) SPY

Now year to date, the Nasdaq has been outperforming. But it too was hit by a reversal, giving back all the gains that started the week. The QQQ ETF shows this well:

January 2020 Trend-Following Market Update and Trade Ideas (Part 4) QQQ

Of course, it would be nice if the market went up everyday. But the good news is, market pullbacks can help reset some extended trends and allow for better risk/reward setups.

It’s also a good reminder to always have a plan for when to sell.

The other factor to keep in mind right now is earnings season is currently underway. With some big names reporting in the next two weeks, we might get a hint on whether the major trend from here is up, down, or sideways. Often earnings reactions’ can set the tone for the next few weeks.

At the same time as stocks were pulling back, the bounce in treasury bonds might further imply a risk-off posture by most market participants:

January 2020 Trend-Following Market Update and Trade Ideas (Part 4) TLT

Looking overseas, it does appear this selling isn’t just limited to US stocks either. In particular, emerging markets took a bit of a hit.

Here’s EEM:

January 2020 Trend-Following Market Update and Trade Ideas (Part 4) EEM

Now as you might expect, China is a large component of the emerging index. And with the Corona Virus outbreak appearing to accelerate in the country, – shutting down transportation, restaurants, and cinemas at the busiest time of year – it’s no surprise to see the country ETF pulling back:

January 2020 Trend-Following Market Update and Trade Ideas (Part 4) MCHI

To be honest, it’s hard to imagine this selling reversing on a dime. MCHI closed the week near the lows after a steep run higher. At the least I’d imagine it’ll consolidate a bit before bouncing back. So…

Considering the scary news narratives taking hold and the steep run-up in the months prior, you might yet get some dips to buy. Another approach is to continue to focus on stocks putting up strong earnings results this season and shrugging off the bearishness.

And there’s just one such idea I want to share with you next!

January 2020 Trend Following Trade Idea (Part 4):

One of my beliefs about long-term stock trends is that operating results (and earnings-per-share in particular), drive the stock price. Of course on any given day the stock can go up or down. But the trend over months, quarters, and years at a time tends to follow the operating results.

So when the market is pulling back, I pay attention to tickers that are hitting new highs. Especially when it’s driven by

Thus I present you, Atlassian (TEAM):

January 2020 Trend-Following Market Update and Trade Ideas (Part 4) TEAM

Even though the market was slumping, TEAM put up strong operating results that could help the stock price get going again. And personally, I’m happy to bet on another leg higher. For my style of trend following I’d use a trailing stop about $22 below entry price.

In terms of the recent earnings results behind this big bump in the stock price, are some of the highlights from last quarter, via Seeking Alpha:

January 2020 Trend-Following Market Update and Trade Ideas (Part 4) TEAM earnings

Now I appreciate it’s hard to buy a stock that’s already moved 10%. And alternatively, I think there is a case to be made TEAM could see some resistance around $150 per share. So you could just put it on a watchlist and wait for a pullback.

But consider this: If a stock is going to go up 30%, 50% or 100%, it has to go up 10% first. So I’m willing to wager this recent success isn’t by accident.

To wit, TEAM has been executing effectively for years. Just look at the long-term fundamental trends from Morningstar that show the company continuing to grow year-after-year. Again, this kind of thing doesn’t happen by accident:

January 2020 Trend-Following Market Update and Trade Ideas (Part 4) TEAM Financials

Notably, revenue and free-cash flow have marched up in lock step. With Atlassian’s software in high-demand, I’m cautiously optimistic these trends – (both fundamental and technical) can continue. But please do your own due diligence too!

Now before we finish…

I also want to share my existing trend-following trading positions for US-listed stocks with you. So here they are in a FinViz watch list! Take a look if you’re still itching for more potential trade ideas.

They might be of interest because everything is laid out in charts so you can easily see what’s what.

Because actually, there have also been a lot of great trends this week so I’m quite bullish on many of my existing holdings.

And plus…

I hope seeing my current stock portfolio helps give you more context on how I’m seeing the current market, AND, where I’m placing my bets.

Speaking of…

While I’ve obviously shown you some of my favourite picks for the week ahead, I can also help teach you how to fish for your own trading ideas!

Just keep reading.

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Well… it’s a +90-page PDF… packed with everything I know about finding, buying and trading breakout stock picks.

This Blueprint shares the EXACT step-by-step process I use to find and trade stock picks each week (just like the ones above). So…

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