The Perfect Technical Trade for This Market

I continue to be very uneasy about the market and believe it could begin trending lower at any time, so my natural inclination is buy inverse exchange-traded funds (ETFs). These are baskets of stocks that move higher when the market moves lower.

I gave you a great inverse ETF a couple of weeks ago, ProShares UltraShort S&P 500 (NYSE: SDS). I recommended this ETF because my systems were telling me then, and they continue to tell me now, that this market could move lower in the near term — perhaps a lot lower. But, what did the market do last week? It moved high enough to stop us out of the SDS trade.

But remember: I am a rules-based investor. I have rules for getting into a position and rules for getting out. The rules for getting in are still flashing “Short!” But just because I have a rule that tells me when to short the market, it doesn’t mean that I ignore my rules for getting out of a trade.

There is an old saying that the market can remain irrational longer than you can remain solvent. One of these days, the market’s trend will reverse and I am afraid that it will not be a happy ending.

But, that may not happen today, or this week or this month (probably). The market is saying, “Eat, drink and be merry, for tomorrow will undoubtedly never come.” No one knows when the day of accounting will come. My forecasting systems indicate it could start this December — maybe sooner.

Indeed, if the market does actually begin to roll over this coming week, I will personally, be looking to pick up some SDS shares. In the meantime, I like the way my top-rated stock — this week’s Trade-of-the-Week pick — is performing in a market that seems to defy gravity.

[To receive free trading recommendations before the market opens each week from either Dr. Melvin Pasternak or Mike Turner, go here to sign up, risk-free.]

Let’s look at my pick for this week, Gilead Sciences Inc. (Nasdaq: GILD).

To begin with, the bio-tech world tends to run on its own steam. True, it cannot completely ignore the broader markets, but when a fundamentally and technically strong stock like GILD bubbles to the surface, I do not want to ignore it.

GILD is a global player in the field of biotechnology and biopharmaceutical research, development and production of life-saving drugs and therapeutics. The company, based in Foster City, California, has just about everything that I look for in a company and, by extension, its stock.

The fundamentals for GILD are very strong. Those with the largest impact include:

  • The growth rate for total sales for the most recent quarter versus the same quarter a year ago came in at +17%. By comparison, the S&P 500’s average growth rate for the same period is +11%.
  • The growth rate for total sales for the trailing twelve months versus a year ago came in at +31.3%, compared to the S&P 500’s average growth rate of +6.4%.
  • The growth rate in sales for the previous five years comes in at +39.6%. GILD’s industry average growth rate during this time period is +26.2%. The S&P 500’s average growth rate was about +10%.
  • The earnings growth rate for the most recent quarter compared with the same quarter a year ago is +29.6%. By comparison, the industry growth rate in that same time period for its industry is +3.9%. 
  • GILD’s earnings growth rate for the trailing twelve months compared with a year ago came in at 40.64%.
  • The earnings growth rate for the previous five years is +41.7%, compared with the industry average of +22.1% and the S&P 500’s average of +7.6%.
  • Within GILD’s industry (Biotechnology and Drugs), the stock’s price-to-earnings ratio (P/E) of 11.4 makes it undervalued compared to its peers.

The technical indicators for GILD are nearly perfect. Here are some of my technical observations:

  • To begin with, GILD has just moved out of zone 1 and into zone 2. This is typically a good sign that momentum is shifting into a positive trend for the stock. With the stock trading in the bottom half of its three-year pricing range, there certainly looks to be room to the upside before encountering major technical resistance.
  • Institutional ownership of the stock is 90%, which generally means the big institutions like the results of the research they have done on the company. I also infer from this level of institutional ownership that these big investors believe the stock’s share price is likely to move higher in the future.
  • Both the industry (biotechnology and drugs) and the sector (healthcare) are in strong bull-mode. This means the average price of every stock in GILD’s industry and sector is above the trend-line and moving higher. This also probably means that more money is flowing in to the industry and sector than flowing out and could put pressure on GILD to move higher.

Action to Take –> If you’re interested in making this trade, consider buying GILD with a limit order at $37.96. I also recommend placing a stop-loss at $35.94 for downside protection. My target price for this trade is $47.00, which would lead to a gain of more than +28%.