NYUGrad posted on technology company sales reps hitting their targets today. You can read it here: Death of a Salesman. He lists various figures for a bunch of companies.
Extreme Networks
One of the companies with a higher score is Extreme Networks. This is a stock I’ve posted here before. First on October 31, A Bullish Chart. Then again as part of a longer discussion about what constitutes a based take and a based chart: The Based Take on China's RRR Cut.
Here’s how it looks now.
I see it as overall bullish with a short-term bearish setup that delivered last week. Since the overall market is bearish, it will struggle absent stock-specific catalysts. What’s key is the relative outperformance it shows. When looking for rally plays and new bull markets, you want to find the relative outperformers during the bear phase. Absolute outperformance is great too, but if you’re accumulating the bear market can be your friend.
On a relative score, EXTR is back to where it previously ran out of relative steam versus both the networking sector (represented by an ETF trading under the symbol IGN) and the Nasdaq 100 ETF (QQQ):
The perfect setup for me is as follows. The bear market resumes and pulls EXTR lower, but it continues outperforming versus IGN and/or QQQ. Best if IGN is outperforming relative to both. Currently, EXTR is about 15 percentage points of outperformance away from a relative breakout versus IGN. A 10 percent drop in EXTR would not violate the horizontal support. If IGN slid a bit more than 20 percent, EXTR would achieve a relative breakout. This would be a high-confidence long setup coming out of a completed bear or moving into a bear rally.
The above is not a forecast. It’s to illustrate how I view this stock here and how I approach a potential trade. Having said that, there is a high probability that something develops here, which is why I have been watching it.
Processing An Investment
This is a blog post, so I’ll leave some things off, but here’s a short list of how I go through finding potential longs with buy-and-hold potential, specific to how EXTR came up.
I use charts as a starting and finishing screen. I can find targets for investment via the chart, then do fundamental analysis. Or I have a fundamental case laid out and check the chart. The latter would be something like TDW earlier this year as an oil long.
A good fundamental story will underlie every good long, but you might not know it yet. I want to see the bullish scenario, better to see events moving in that direction. (A specific fundamental case for EXTR is government spending on broadband infrastructure.) Otherwise, I’m only going to be thinking trade initially (such as my long biotech trade this summer). Via negativa, the bear case is well known and a worse-case scenario is also already priced in.
In the case of EXTR, the networking sector (IGN being the proxy here) popped up in my momentum system. I track hundreds of ETFs for a long-only investment system that does very well in bull markets and helps me greatly with identifying where to hunt for trades and investments. IGN moving high in the rankings is an early warning of a potential, but not guaranteed, emerging fundamental story.
Mentions. Which takes me back to the NYUGrad post. The more mentions I see of a stock or sector, the more I see from diverse sources that seldom discuss the same topics, and the more I see from people whose opinions I value, the more interested I become. Best case, something will be an emergent move that is gaining traction, but not yet appearing in mainstream outlets with millions of eyeballs.
Extremely Promising
To conclude on EXTR, there is a pure chart setup with a clear bullish breakout, but with a short-term bearish move. This is excellent if you want to enter or add to a long trade or investment. I explained above how it would play out in my dream scenario.
Two, there’s corroborating evidence of the networking sector outperforming; this gives slight additional confidence that a longer-term rotation in a formerly underperforming tech subsector is underway.
Three, there’s fundamental support from government spending (probably priced in, but markets don’t price everything in initially which is why momentum systems work) and stock-specific strength such as earnings which I haven’t discussed here, along with the sales figure highlighted by NYUGrad.
Finally, there’s the mention by NYUGrad who I’m familiar with as a fellow member of the Slope of Hope. I’ve come to value his comments over the years. In this case, it’s not that he sees the EXTR chart the same way as I do. His data point is a good one that raises confidence in a potential long, but it’s not that either. The important information is that I value his opinion, he’s looking for potential longs despite being generally bearish (like me) and EXTR came up. And he did it independently of how I came to it.
The list of great trade and investment setups that never panned out is long, but I’m paying close attention.
P.S. This is exactly the type of post I’d like to put behind a paywall because I don’t want this idea getting out until I and my readers have a position on should the best case scenario play out. In this case, it probably doesn’t matter because it’s a contrarian play. But EXTR is a fairly small company with a $2.44 billion market cap…
When I Go Extreme Long
Cool, I would definitely pay for a subscription to LZ's bullpen. Especially for your outlook on gold and platinum miners once this bear market kicks into gear.
Excellent post! I found $EXTR by my habit of checking 52 week high list every day ;)