The stock market ended January on a high, with the Nasdaq composite leading the charge. This bullish surge has set off a rare buying signal that could produce windfall profits in coming weeks. Let's look at this seismic shift and how to play Nasdaq heavyweights Applied Materials, Synopsys and Axon Enterprise.
First off, what is a power trend and how can you profit from this rare market occurrence?
The Nasdaq composite rose 11% in January, its best start since 2001. The uptrend has now fulfilled the narrow criteria of what IBD's Market School calls a "power trend". This potent buying signal means the index has entered an unusually strong uptrend that has the potential to produce windfall profits.
This signal requires that four technical elements are fulfilled at the same time:
- The 21-day exponential moving average must be above the 50-day moving average for at least five days.
- The index low must be above the 21-day line for at least 10 days.
- The 50-day line must be in an uptrend for at least one day.
- Finally, the market must close higher for the day.
The Nasdaq met these requirements Tuesday, when the 21-day line closed above the 50-day line for a fifth-straight session.
A power trend typically ends when the 21-day line crosses back below the 50-day line.
Power trends are times to play aggressive offense while maintaining 100% discipline. Now is a good time to buy aggressive growth names breaking out of sound bases. Also consider adding to positions that have made good progress.
Here are a trio of Nasdaq stocks to kick-start your power trend strategies.
Playing The Nasdaq Power Trend
Semiconductor equipment giant Applied Materials could offer a profitable way to play the power trend. The PHLX semiconductor index has rallied over 20% so far this year, even stronger than the Nasdaq composite.
AMAT stock has formed a cup base and mounted an ideal buy point of 116.19, according to MarketSmith analysis. The relative strength line has muscled higher as it passes this low-risk entry point.
The stock boasts a good mix of earnings and performance, landing in the top 14% of stocks over the past 12 months.
However, quarterly growth has declined at the Silicon Valley chipmaker, with analysts now forecasting a 2023 profit decline.
CEO Gary Davidson sees the bright side, noting that although "we are slowing the rate of spending growth in the near term amid geopolitical and macroeconomic challenges, we are making the strategic investments to win the major technology inflections that will enable Applied to outgrow the semiconductor market."
Big Money also sees stronger prospects ahead, generating an impressive "B" Accumulation/Distribution Rating that reflects bullish buying among funds over the past 13 weeks.
Applied Materials is scheduled to report earnings on Feb. 16.
Synopsys Mounts Buy Point
Nasdaq component Synopsys has mounted the 364.09 buy point of a cup-with-handle base. Stock market performance is improving, with the RS line turning higher in recent weeks.
Overall strong performance is reflected in its 88 out a perfect 99 Composite Rating.
The Earnings-Per-Share Rating has surged to 91. That upward trend should continue, with analysts projecting 17% growth in 2023 and 16% in 2024. Estimates have also gotten upward revisions, a good sign. Institutional ownership is stout, with 59% of shares currently held by funds.
Synopsys makes chip design software and tools to assure quality and security in applications. The Electronic Design Automation (EDA) industry is growing rapidly and the company's booming EDA division provides customers with tools to design their own chips.
Many software and technology firms have shifted to in-house chip design after years of contracting to third parties. Allied Market Research now predicts the EDA market will grow from $11.5 billion in 2020 to $20.8 billion in 2027.
Axon Double Buying Signals
Longtime Nasdaq member Axon Enterprise has just cleared daily and weekly buy points below the 200 level, setting off multiple buying signals.
The relative strength line just hit a fresh high after a period of consolidation between July and November. Axon is among the top 3% of stocks in terms of performance over the past 12 months.
Earnings performance is solid but unspectacular, yielding an 83 EPS Rating. However, Wall Street expects improvement, with full-year EPS forecast to climb 33% this year. That's excellent in a slowing economic environment.
Institutional investors have also snapped up shares of late, reflected by the near-perfect "A" Accumulation/Distribution Rating. In total, 58% of the stock is held by funds while management holds 7%.
Axon Enterprise is best known as the maker of the Taser stun gun.
But the Scottsdale company makes a wide range of products for law enforcement and military clients, taking advantage of public demands for more police oversight. Its line of body cameras and accompanying software are now market leaders.
Credit Suisse has named Axon a Top Pick for 2023.
Please follow Michael Larkin on Twitter at @IBD_MLarkin for more analysis of growth stocks.