Under The Hood (10-16-2020)

From the desk of Steve Strazza @Sstrazza.

Welcome to our "Under The Hood" column for the week ended October 16, 2020.

What we do is analyze the most popular stocks during the week and find opportunities to either join in and ride these momentum names higher, or fade the crowd and bet against them.

We use a variety of sources to generate the list of most popular names. There are so many new data sources available that all we need to do is organize and curate them in a way that shows us exactly what we want: A list of stocks that are seeing an unusual increase in investor interest.

Whether we're measuring increasing interest based on large institutional purchases, unusual options activity, or simply our proprietary lists of trending tickers... there is a lot of overlap.

The bottom line is there are a million ways to skin this cat. Relying on our entire arsenal of data makes us confident that we're producing the best list each week and gives us more optionality in terms of finding the most favorable trade setups for our clients.

There are so many good setups in this week's list of popular stocks. Let's jump right into it.

Click table to enlarge view.

Spoiler alert: this week's theme appears to be biotech. That's bullish information for the overall industry, especially as the Nasdaq Biotech ETF $IBB is consolidating constructively just above key former resistance.

As always, we like to bet on the individual leaders within each area as that's where the true alpha lies. Here's a weekly chart of Pacific Biosciences $PACB, which is one of the largest components in the ARK Genomics ETF $ARKG. Based on ARK's track record, this is typically a very good sign. Read more about it in our recent piece about ARK ETFs here.

This one recently popped on our radar due to new institutional ownership as the Q3 13F filings came out this week showing not just ARK Invest adding a large number of shares, but also a variety of Hedge Funds. I guess that helps explain the recent run-up in the stock in recent months.

PACB is up roughly 550% from its March lows, with most of those gains occurring in just the last two or so months. Momentum is at record extremes on both the daily and weekly timeframe.

Long story short, while this is definitely one we want to keep on our radar, it's a bit too stretched at current levels. Let's see how price digests these recent gains at its prior high near 14. If the stock consolidates constructively above that level then this is definitely a name we'll want to be involved in in the future.

Speaking of stocks on our radar, here's Bed, Bath & Beyond $BBBY, which we already covered earlier this month.

Here is what we said just a few weeks ago:

Price is also breaking out relative to the broader market, as BBBY has been steadily outperforming off the March lows. As long as we’re above the Q1 highs near 18, the bias is higher. For now, we want to wait and see how price digests its 40%+ move from last week.

Well, there really wasn't much digestion like we were expecting, as BBBY has rallied almost another 40% in the time since. This is another that is extremely overbought on both a daily and weekly timeframe. Let's see how price reacts in its current range. Eventually, we'll either want to buy weakness back towards the 18 level or strength above the 26.50 area.

Here is Tyler Technologies $TYL which just broke out to new all-time highs within the context of a monster structural uptrend. This is an enterprise software name.

This is a longer-term setup and is definitely not for everyone as the stock trades very low volume due to its high level of institutional ownership.

If we're above 380 we want to target 506 over the next 2-4 months.

Now for some crowd-favorites. Here is Zoom Video $ZM, which we covered less than a month ago.

Here's what we said in our recent report:

If you already own Zoom or are looking for a more tactical trade, as long as it’s above the recent pivot high of 478, we think price heads another 20% or so higher towards 584 in the near term.

Fast forward less than a month, and we're just a few percent below our near-term target. Now, we're ready to put a longer-term trade idea out on the name. This continues to be a major market leader due to its relentless relative strength this year (lower pane).

We only want to buy Zoom on strength above 570 with a target at 880. That would be another 50%+ move from current levels so we want to be a little patient and continue to let price consolidate if it needs to. Our timeframe is 3-6 months.

Now for the darling of the semiconductor industry, Nvidia $NVDA.

In early July, we said we wanted to be long Nvidia if price was above 390 with a target at 560. It's recently achieved our target and is now consolidating right around that 550-560 level.

We want to own Nvidia as long as price is above 550 with a 3-6 month target just above 800. This would be another big move for a stock that has already booked some major gains since its 2018-2019 lows. As we always say, we like to stick with the winners, and these outperformers have yet to give us any reason to stop doing so.

Now let's get into some new names that are fresh on our list this week.