With The Top 10 Picks In The Stock Market DRAFT, EarningsBeats.com Selects…

We’re one day away from “DRAFT Day”! Every quarter, we select the 10 equal-weighted stocks that will comprise our 3 portfolios – Model, Aggressive, and Income. My background is in public accounting as I audited companies in the Washington, DC – Baltimore, MD metropolitan area for two decades. While most of my teaching generally encompasses technical analysis and how I use it, I still haven’t let go of my “roots” on the fundamental side. Earnings matter to me. I believe that management teams should develop a business plan that works to their strengths and limits the impact of their weaknesses. And the BEST management teams execute their plan to perfection, beating their own expectations and those of Wall Street.

In order to take advantage of this clear competitive advantage in management teams, we created our flagship ChartList at StockCharts.com, our Strong Earnings ChartList (SECL). I believe that management performance and integrity is so important that I won’t select ANY company for our 3 portfolios, unless it’s on our SECL. Currently, we have 390 companies on this ChartList. Roughly 7-8% of them will be “drafted” by us tomorrow afternoon during our “Top 10 Stock Picks” live virtual event. It’s completely FREE and you’re welcome to join us and witness the process that I go through to assess the current stock market environment and then select the stocks in the best position to benefit from that environment. CLICK HERE for more information and to register.

Let’s look at 3 companies that MIGHT make sense in our portfolios and that will be given considerable consideration:

Walt Disney Co (DIS)

It looks like the triple bottom on the long-term DIS chart near 80 has held and a new uptrend has begun. For the first time since 2020, DIS has made a successful 20-week EMA test and then gone on to break out to new high. We hadn’t seen this since the 20-week EMA was tested during Sep/Oct/Nov 2020. Check this out:

That bottom panel is worrisome for sure. The broadcasting & entertainment index ($DJUSBC) has been absolutely horrific vs. the S&P 500 for 3 years now. Can DIS perform well in such an awful industry environment? Will the industry group begin to reverse, with DIS providing leadership? That’s a difficult call. What we do know, however, is that DIS just posted excellent quarterly results. Revenues came in at $23.55 billion, slightly ahead of consensus estimates of $23.41 billion. Earnings were quite strong, however, at $1.22 per share. Expectations were set at just $.97.

Is DIS worthy of a first-round draft pick? We’ll talk about that tomorrow.

Meta Platforms (META)

Many of our scouts are saying that META could be the #1 overall draft pick. Hailing from the incredibly bullish internet space ($DJUSNS), which has been second only to semiconductors ($DJUSSC) in terms of best relative performance to the S&P 500 over the past year, META has had an MVP type of season, leading its industry peers. Here’s the current chart:

META is one of 8 stocks on our Model Portfolio last quarter that still resides on our SECL. There’s a good chance it gets selected in back-to-back drafts. Over the past 3 months, META gained 41.63%, only beaten by Palo Alto Networks (PANW), which gained 51.22%. Not too surprisingly, our Model Portfolio racked up a quarterly gain of 21.87%, which CRUSHED the S&P 500’s gain of 10.08%.

Sure, it’s trendy to say that META is overbought, along with most every other key technology or communication services name. But those who only look at the last year’s STRAIGHT UP move like to conveniently ignore the fact that META dropped 75% the year before during the cyclical bear market. Market makers were able to scoop up this All-Star at dirt cheap prices for their wealthy institutional clients. Maybe those institutions can give the #1 draft pick acceptance speech, thanking everyone who panicked during that manipulation-driven selloff.

What about META’s fundamentals? Well, last quarter the company produced revenues of $40.11 billion, easily surpassing its $38.99 estimate. And instead of the widely-expected profit of $4.83, META blew the doors off that number, instead coming in at $5.33. What’s not to like here?

Let’s see if META has its name called first on Tuesday! Or how about the other 7 Model Portfolio returning starters? Could they be re-drafted? What a great problem to have!

AZEK Company (AZEK)

It’s easy to talk about META, AMZN, NVDA, etc., but our scout team needs to look deeper and take a stand on potential high-flyers from time to time. Yes, their floor might not be nearly as high as a company like META, but the potential to the upside can be staggering for smaller-cap companies. AZEK isn’t part of the scorching-hot technology (XLK) or communication services (XLC) sectors. Instead, AZEK is a $6.6 billion company in the industrials (XLI) sector and designs, manufactures, and sells building products for residential, commercial, and industrial markets in North America. Technically, it’s been an exceptional performer over the past few months:

Like META, AZEK is a relative leader in a leading industry group, building materials & fixtures ($DJUSBD), which I always love to see. The DJUSBD is the 8th best-performing industry group over the past year. But AZEK is also a smaller company and we know that small caps have struggled relative to their larger cap counterparts. Still, it’s hard to ignore the numbers posted by AZEK. Their revenues were $240 million vs. their expected $234 million. And earnings doubled expectations, $.10 vs. $.05. Results like this can change the future projection of earnings, especially when guidance is raised. AZEK raised its Q2 revenue guidance significantly from $381.6 million to a range from $407-$413 million. And then what happens if AZEK beats estimates again?

Is the potential here solid enough to result in a Top 10 selection?

We have our work cut out for us tomorrow. I’ll be secluded for the next 24 hours in our EarningsBeats.com “War Room”, deciding where the stock market may go over the next 3 months and which areas and stocks are poised to benefit from it. If you’re interested, you can find out more information about this FREE event and REGISTER here.

Happy trading!

Tom

Tom Bowley

About the author:
Tom Bowley is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market.

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The EarningsBeats.com Strategy For Uncovering The New Winners

Earnings and interest rates are always the key drivers to stock market success. There may be other short-term factors that influence price action, but, at the end of the day, rising earnings and interest rates conducive to job and economic growth is what results in secular bull markets.

Organize Your Trading Candidates With ChartLists

While I follow interest rates very closely and consider them when evaluating likely future market direction, it’s really the earnings reports that we follow most closely at EarningsBeats.com. Q4 earnings are not yet complete, but most of the very influential companies in the Dow Jones, S&P 500, and NASDAQ have reported. Our research, including earnings research, is organized into many ChartLists, which I briefly describe below:

  • Strong Earnings (SECL): companies beating both revenue and EPS estimates and meeting other liquidity and performance filters. I view it as a list of companies demonstrating high quality technicals and fundamentals. It’s the ChartList that I trade from most frequently.
  • Strong Future Earnings (SFECL): companies that show excellent relative strength (high SCTR scores) and adequate liquidity that are not already on the SECL. I think of it as a list of excellent companies that simply weren’t able to beat estimates in their prior quarter, but who are trading as though they may do so in the quarter ahead.
  • Strong AD (SADCL): companies showing excellent relative strength (high SCTR scores), adequate liquidity, and rising AD (accumulation/distribution, not advance/decline) lines. The AD lines IGNORES opening gaps and focuses only on price action during the day, with volume being the multiplier. Companies on this ChartList are companies that tend to trade higher into the close, suggesting morning weakness might be bought.
  • Raised Guidance (RGCL): companies that, as the name would suggest, raise guidance – either revenues, EPS, or both. I like management teams that feel confident in their business and raise guidance throughout the quarter.
  • Bullish Trifecta (BTCL): companies that are common to the SECL, SADCL, and RGCL. These companies have produced strong quarterly results, have raised guidance, and show possible accumulation by big Wall Street firms.
  • Earnings AD (EADCL): companies that gain AT LEAST 5% from the opening bell to the closing bell on the day after earnings are reported. I then review every one of these companies and provide my Top 30 – companies that I really want to consider trading in the days and weeks ahead.
  • Short Squeeze (SSCL): companies whose float is heavily shorted. We track those companies with short percentage of float in excess of 20%. High short interest can trigger massive short squeeze rallies.
  • Seasonality (SEASCL): companies that have a history of performing well during certain calendar months.
  • Portfolio ChartLists: every quarter, we provide a list of companies that we “draft” into our 4 portfolios – Model Portfolio, Aggressive Portfolio, Income Portfolio, and Model ETF Portfolio.
  • Relative Strength Industry Groups (RSICL): This is an exclusive ChartList for our annual members that tracks the relative strength of every industry group over the past few years. Trading leading stocks in leading industry groups is how you beat the S&P 500 and this ChartList provides us those leading industry groups.

There are other ChartLists that we create from time to time, but you can see from the above that our research is broad and provides a TON of great information for our members on a regular basis. But before trading anything, it makes sense to evaluate the current state of the market. Is the current rally sustainable?

S&P 500: Is the Current Rally Sustainable?

I say yes. Sure, we’ll have some pullbacks along the way, but right now money is flowing into aggressive areas of the market and that “risk on” environment bodes well for higher prices ahead. Check out this S&P 500 chart with several key “sustainability” ratios in the panels below the S&P 500 price chart:

Is this not obvious? Money continues to POUR INTO aggressive areas. The 6 sustainability ratios above can be summarized as follows:

  • QQQ:SPY – NASDAQ 100 performance vs. S&P 500 performance. The NASDAQ 100 is a much more aggressive index, focusing almost solely on high growth large cap stocks.
  • XLY:XLP – consumer discretionary vs. consumer staples. Two-thirds of our GDP is consumer spending. It just makes sense to see which area of consumer spending, aggressive discretionary vs. defensive staples, Wall Street is favoring. That tells us what the big Wall Street firms are expecting in the months ahead.
  • IWF:IWD – large cap growth vs. large cap value.
  • $DJUSGL:$DJUSVL – another measure of large cap growth vs. large cap value
  • $DJUSGM:$DJUSVM – mid cap growth vs. mid cap value
  • $DJUSGS:$DJUSVS – small cap growth vs. small cap value

Every one of my aggressive vs. defensive ratios is climbing. Personally, I love all the pessimists out there constantly trying to tear apart this bull market. The problem is that many analysts are trying to handpick one or two SECONDARY indicators to determine market direction, which is absolutely wrong in my opinion. We remain extremely bullish if we look at the primary indicator, which is price and volume. Sentiment does a great job of marking market tops and bottoms and my favorite sentiment signal is the equity only put call ratio ($CPCE).

Sentiment Paving The Path To Higher Prices….For Now

Despite the nearly straight-up move that we’ve seen on our major indices since late-October, there is little complacency in the options world. Over the past 11 years, or approximately the duration of this entire secular bull market, the average daily CPCE reading has been in the .60-.65 range. Readings higher than this show an unusually heavy dose of equity put buyers (which coincides with market bottoms or approaching market bottoms), while lower readings suggest an unusually heavy dose of equity call buyers (which coincides with market tops or approaching market tops). While action has been mostly bullish in 2024, the average CPCE reading in 2024 has been .65 – a far cry from the 5-day average readings of .55 and below that typically mark market tops. Check this out:

Those red arrows highlight the very low 5-day CPCE readings and show you where the S&P 500 was at roughly the same time. After reviewing this chart, I’d quickly conclude that this rally may continue until we see options traders start pouring into equity calls. Friday’s CPCE reading was 0.48. If the S&P 500 continues higher through much of next week, it’s possible we could finally get a 5-day CPCE reading below .55 to mark a top. Friday’s 0.48 reading was a good start. Keep an eye on this throughout next week.

What Stocks Are Likely To Lead The Next Market Surge

Well, I believe our Earnings AD ChartList (EADCL) will hold the key. Again, this ChartList comprises 30 names that performed exceptionally well the day after its earnings were released as new fundamental information started to be priced in. I expect many of them to perform very well in the weeks ahead. Most of the companies on this ChartList are leaders among their peers. But others might just be getting started. Let me give you 1 of the 30 stocks featured, and one that might fit this description of just getting started – Allegro Microsystems (ALGM), a $6.1 billion semiconductor company:

ALGM’s relative strength vs. its semiconductors peers has been awful. But is it just starting to reverse higher? The AD line began strengthening a few months ago at the initial bottom and, on Friday, ALGM finally broke above a triple top. Notice that volume that accompanied the post-earnings run. We never have any guarantees of future price direction, but I’d certainly say that ALGM has my attention and is a stock that I’ll be watching as this could be the start of a very powerful advance.

In tomorrow’s EB Digest, our FREE newsletter, I’ll be providing everyone a link to our ENTIRE Earnings AD ChartList. If you’re a StockCharts.com Extra or Pro member, you can download this ChartList right into your SC account. Otherwise, you can view all 30 charts to see which stocks could be our leaders in 2024. If you’re not already a FREE EB Digest subscriber, it’s easy to get started. Simply CLICK HERE and provide us your name and email address and we’ll be happy to send you that Earnings AD ChartList in our Monday EB Digest newsletter. There is no credit card required and you can unsubscribe at any time.

Happy trading!

Tom

Tom Bowley

About the author:
Tom Bowley is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market.

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#EarningsBeatscom #Strategy #Uncovering #Winners

Your Money And You: This Investment Strategy May Very Well Be Your Best Choice?

Every one of us faces this question as we look to the stock market for a better financial future. Let me first start this article with the understanding that the stock market isn’t your only choice in terms of investing in your future (or your child’s or grandchild’s future). But this article will ONLY focus on the stock market.

Your Choices

There are a number of factors to help you decide which investment strategy is right for you. Your age, investment horizon, and ultimate goals will likely weigh heavily in devising your own personal investment strategy. Beyond that, however, you must consider the level of risk you’re comfortable with. Not all stocks in the stock market are equal-weighted in terms of risk.

Growth Stocks Seeking Capital Appreciation

Stocks dependent on strong earnings and strong future earnings growth might be perfect for anyone willing to take higher risks and have plenty of time (younger age) to recoup losses in the near-term, especially if your strategy will be consistent with additional future investments being made as well as current investments. Growth stocks can generate very strong returns in a favorable environment of low interest rates and strong future earnings, but many do no pay anything out of current earnings (think dividends). As economic conditions change, valuations can drop rapidly with lowered expectations of earnings and growth. You don’t have to look back that far (2022 cyclical bear market) to see how far growth stocks can fall in a very short period of time.

As an example, let’s look at NVIDIA Corp (NVDA), which has gained 236% over the past year, but pays no dividend. It’s been the leading NASDAQ 100 stock, along with six others that have more than doubled over the past year:

  • CRWD: +190.98%
  • META: +181.64%
  • AMD: +157.32%
  • PANW: +140.03%
  • AVGO: +119.94%
  • ZS: +109.56%

As a growth stock investor, it’s these types of gains that make investing fun. But there’s a dark side to this group as well. We only need to look back at the past few years of NVDA performance to understand the roller coaster ride that your growth stock might take your money on:

Right now, I’m sure everyone would have liked to have owned a lot of NVDA. But the same wouldn’t have been said at the end of 2023, when NVDA’s 1-year rate of change (ROC) had fallen close to -60%. Bear markets can be absolutely brutal for growth stocks, because their future earnings growth and earnings growth rates contract with economic activity. And, if that’s the primary factor in growth stock valuations, it’s going to be very painful. Even the 6-month ROC in September 2023 was close to -60%. Imagine that your entire portfolio is situated in growth stocks like NVDA 6 months to a year prior to the start of retirement. Then think about the pain and stress, both emotional and financial, that type of drop would inflict on you. When you consider your strategy, you MUST consider all possibilities, not just the best ones.

Conclusion: Investing in growth stocks should be considered in EVERY portfolio. Even those who have already retired could have a nest egg expected to last another 20 years or more. But you won’t need all of that money in the first year of retirement. A portion of your savings will be needed 10-20 years down the road or longer. This portion could be invested a bit more aggressively as you won’t need this money for many years to come. Historically, growth stocks will typically outperform more conservative investment approaches over periods of 10 years or more. However, determining how much you should invest in growth stocks is based on a number of factors, including age, years to invest, personal risk tolerance, investment purposes, financial goals, etc.

Income Investors Seeking Dividend Yield

This is a more conservative strategy that focuses much more on payments to shareholders out of current earnings and in the form of dividends. These more conservative dividend payers tend to see much more consistency in their earnings picture and much less volatility in their stock price, though there certainly can be exceptions to this general rule. These investment are not usually as highly stressed by shorter-term economic concerns. Utilities and real estate companies quickly come to mind. They are not fully insulated from economic concerns, especially real estate as this group can react to movements in interest rates, but most investors in these two sectors look toward higher income/dividends as a primary reason for investment. To illustrate using a perf chart, let’s compare the price performance of a growth area like technology (XLK) to more income-oriented areas like utilities (XLU) and real estate (XLRE), since the current secular bull market advance began in 2013:

Most technology stocks pay little or no dividend, but you can see that the capital appreciation opportunity is obvious. Many of the big drops in the stock market are felt harder in technology, however. The XLU and XLRE provide much smaller opportunities with capital appreciation as their earnings growth prospects do not fluctuate over the years as wildly as technology companies. But the comparative safety of capital, along with a much, much higher portion of current earnings being paid out by utilities and real estate companies is the preference of many income-oriented investors. Their dividends, many times, compete with an even safer form of investment, U.S. Treasury securities.

Combination of Capital Appreciation and Dividend Yield

For many investors, it’s probably a good bet that owning both capital appreciation and dividend-paying stocks makes a lot of sense. And there are a group of stocks that show significant combinations of both strategies that might appeal to many investors. It doesn’t have to be one or the other. How about the “hybrid” company, one whose dividend yield may be more modest, but the dividend growth rate is strong and fairly sustainable. Here are three stocks that might qualify for this hybrid label:

Proctor & Gamble (PG):

PG is a stock normally thought of as defensive and value-oriented. I’m not sure the chart necessarily agrees with this assessment. Let me start by saying that PG has raised its annual dividend for 68 consecutive years. That’s quite an accomplishment in and of itself, considering the number of secular and cyclical bear markets that PG has endured. And PG hasn’t been a bad grower either. Here’s the price chart:

I’ve changed the chart here to quarterly, since dividends are paid out quarterly. I’ve also lengthened the chart to 30 years, so that you can see the power of capital appreciation AND solid increases in dividends each year. PG has not only raised its dividend for 68 consecutive years, but the AVERAGE increase is 8.6% since 1994. Those dividend payouts have spiked significantly, which tells us that the current dividend payout in 2024 will only continue to increase by a rate that will at least keep up with inflation, if not exceed it. Oh, and then throw in the capital appreciation potential. Nothing is ever a guarantee, but PG has been a very solid investment for a long, long time. If you’re a growth investor, however, the day-to-day movement in PG will likely bore you. Boring isn’t always a bad thing, though, especially when it comes to building financial wealth.

Starbucks, Inc. (SBUX):

SBUX is another long-term solid grower in terms of capital appreciation, but long-term investors might be surprised that its dividend yield is currently 2.43%. The price chart below tells its own story in terms of price appreciation, but check out how quickly the SBUX quarterly dividends have been climbing:

While the SBUX capital appreciation rate has slowed from its earlier years, its ability to generate profits to pay out higher and higher dividends has not. SBUX has an average increase in its annual dividends of 17.76% since the secular bull market began in 2013. In recent years, that average increase has fallen into the high single digits (8-9%), but that’s still a very solid annual increase rate.

Nike, Inc. (NKE):

NKE has been a grower over the years and its annual dividend has increased every year this early this century – through two secular bear markets and 3 cyclical bear markets, which shows the company’s ability to increase shareholder weather – even during the worst of stock market climates. Check out NKE’s capital appreciation over the years:

Despite its underperformance the past couple years, NKE has still been a “10-bagger” over the past 15 years, rising from 10 bucks to 100 over that period. But a rapidly-rising annual dividend, combined with price struggles since 2021, now provides a 1.45% dividend yield. Not only has NKE raised its dividend every year over the past couple decades, but its AVERAGE annual dividend increase has been double digits in all but 2 of those years. During 2009 and 2010, NKE “only” raised its annual dividend 8.7% and 8.0%.

These hybrid stocks do feel an impact from economic activity, but the combination of price appreciation and solid dividends and dividend increases should not be overlooked.

For the past several years, with only minor exceptions (namely, the 2022 cyclical bear market), I’ve suggested sticking with this secular bull market. Betting against these bull markets is a big mistake, in my opinion. The perma-bears just keep digging themselves a deeper and deeper hole. In Monday’s FREE EB Digest article, I’ll provide my argument to derail the most common reason for not investing in the stock market right now. If you’re not already an EBD subscriber and you’d like to see Monday’s FREE article, simply CLICK HERE to register with your name and email address. There’s no credit card required and you may unsubscribe at any time.

Happy trading!

Tom

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Perspective And History Tell Us To Lower Our Expectations For Technology Stocks

No one loves a good bull market more than me. History tells us that we want remain mostly on the side of the bulls. Perma-bears have an awful long-term track record. They’ve called 30 of the last 3 secular bear markets. Honestly, those who cannot ever see anything other than a downtrend ahead should find a new occupation or hobby. Here’s the long-term chart of the S&P 500.

GDP + inflation + innovation = roughly an average 9% annual gain on the S&P 500. Ask yourself a question. How many times have you exited the stock market and wished you had just left your investment alone and untouched? Be honest.

Seriously, how often do perma-bears get it right? Hey, listen, there’s nothing wrong with being bearish from time to time if you’re a shorter-term trader. The stock market moves too far sometimes and rightfully needs to correct. And after years of secular bull market strength, there comes a time when stocks need more than a simple correction and a secular bear market is justified. In my opinion, that’s not now. Talk to me again in 2030. We won’t be in one for a long time as the current 11-year secular bull market rages on. But, even during a secular bull market, the bulls must acknowledge when short-term risks grow and portfolio adjustments should be considered.

I believe now is a good time to lean on perspective and the impact it could have in 2024.

We all know (or should know) that the three aggressive sectors – technology (XLK), consumer discretionary (XLY), and communication services (XLC) – tend to lead most secular bull market advances. But they don’t lead all of them. And there are examples right now that maybe our leaders have led for a bit too long.

The S&P 500 just advanced more than 16% in 41 trading days from October 27th through December 28th. We can use a 41-day rate of change (ROC) to see how often this 16% level is reached or exceeded in this time frame. Check this out:

This type of move typically occurs after a big bear market move lower or after a correction. The 2023 occurrence came on the heels of the July through October correction. These huge gains are not normal and rarely result in similar gains moving forward. We need to pause and allow these gains to be absorbed. Also, election years are weak historically during Q1, which is exactly where we’re situated right now. While I expected a scorching January in 2023 based on a few of my signals, I don’t expect that at all in January 2024. Lows in election years tend to coincide with March.

Currently, the largest sector in the S&P 500 is technology, which represents 28.79% of the benchmark. Discretionary represents 10.84% and communication services totals 8.55%. So these 3 aggressive sectors comprise 48.18%, or nearly half of the benchmark. If these 3 groups simply take a few months to absorb recent gains, we could easily see rotation move into other areas like industrials (XLI), financials (XLF), or health care (XLV). These 3 more value-oriented sectors represent more than 34% of the benchmark. While XLY is in the aggressive sector camp, it actually looks like it could still provide a lift to the S&P 500. More on that below.

Technology (XLK) is clearly the one to watch though as it has the biggest impact on the S&P 500. Currently, from this chart alone, I see significant risks ahead if you’re overweighting technology:

Nothing on this chart looks particularly encouraging for technology. The top part of this chart tells us that technology’s relative momentum was VERY stretched – similar to 2020 – and we know what happened next. It was a lengthy period of average to underperformance vs. the S&P 500.

The middle part of the chart shows that the XLK:$SPX relative strength is at the upper end of its relative uptrend, which makes it difficult to continue outperforming. In fact, it’s probably time to consider weak relative strength ahead. Finally, the bottom panel charts the 52-week relative performance. Money has poured into technology over the past year – again similar to 2018. It wouldn’t be normal for this to continue higher. Once again, this tells me the risk is to the downside and it’s not worth the risk of overweighting technology right now.

I’ll make one last point about the likely relative weakness in technology. Check out this 20-year weekly chart of the XLK:

We’re at the top of the XLK’s 15-year channel, which has been problematic at every point in this channel, with the exception of the after-effects of the pandemic. It just looks like time for a change in leadership for a bit.

So all of this leads me to a big question. If technology underperforms, where should we look for relative strength?

XLY:

The XLY is trading much closer to its lower uptrend line, suggesting strength could easily find its way here.

XLV:

The XLV has been consolidating and, therefore, underperforming the S&P 500 for quite awhile. The recent breakout may be the trigger this group needs to see a lot more money rotating IN.

XLF:

Technically, we don’t usually see this group lead. Given the circumstances of the 2008-2009 financial crisis, the XLF has been a tough place to make money. But I believe the group was undervalued while short-term rates jumped and resulted in an inverted yield curve. 2024 is likely to reverse that condition, which will benefit the net interest margin for banks ($DJUSBK), a significant fundamental tailwind. Should our economy grow in 2024, which I believe it will, it could be a goldilocks scenario for banks – a solid, and perhaps even improving, economy coupled with rising spreads.

It will be very interesting to see how the first quarter of 2024 develops. While I can’t guarantee outperformance or underperformance of any area, I do believe that we can assess risk and make more informed trading/investing decisions.

To become a FREE EB Digest subscriber (no credit card required) and to follow me at EarningsBeats.com, simply CLICK HERE and enter your name and email address. You may unsubscribe at any time.

Happy trading!

Tom

Tom Bowley

About the author:
Tom Bowley is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market.

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Think Really Hard About Who You Want On Your Team

I’m going to start this article a bit different than all the others I’ve written here at StockCharts.com and talk off topic for a paragraph or two.

I grew up in Maryland, quite close to Washington, DC, and was an avid Washington Redskins and Baltimore Orioles fan. I look back now and feel very fortunate that I was able to follow two sports teams that enjoyed decades of success, though both organizations faltered for many years to follow under less-than-desirable ownership. But during the 1960s, 1970s, and 1980s, these two sports organizations won several championships and constantly competed for more. It started with the owners and the culture they built. They hired the right people to build from the ground up and eventually hired two “on-the field generals” that the entire community could embrace. I know I’m a “homer”, but Earl Weaver (Baltimore Orioles Manager from 1968-1982 and also one other year – 1985) and Joe Gibbs (Washington Redskins Head Coach from 1981-1992 and 2004-2007) were two leaders that I immediately respected. I admired Earl Weaver as one of the pioneers of using analytics in his decision-making and he influenced my career as I’ve become quite the stock market historian over the years. Weaver platooned outfielders, depending on pitching matchups, and was one of the first managers to use late inning relief pitchers to seal victories. I’m a “numbers guy” and always have been and I use similar “historical matchups” in the stock market. The use of analytics just makes perfect sense to me.

Joe Gibbs, to this day, is one of my favorite human beings ever. He’s a man of high character, integrity, faith, and family. He is unquestionably a leader, as evidenced by his NFL coaching career, and later, his NASCAR career. He’s simply a winner. His players would run through brick walls for him. He had conviction and he was innovative. Do you know who started the “one-back” set? Counter trey? During his first year as head coach of the Redskins, he started 0-5 before finishing the season on an 8-3 run. The next season, he won his first Super Bowl. He became the only NFL coach in history to win 3 Super Bowls with 3 different starting quarterbacks. Conviction and innovation matter.

These two sports teams and these two coaches, in particular, were of great inspiration to me. They were perfect examples of how to gain an edge on your competition and how you do things the right way.

When I had the opportunity to join the StockCharts.com “team” nearly two decades ago after ending my public accounting career and founding EarningsBeats.com (formerly Invested Central), I jumped at it. Partnering with StockCharts just felt right and we’ve never looked back. While StockCharts.com offers a great trading & tools platform at various price points, they also place a huge emphasis on research and education, two of our three pillars at EarningsBeats.com. I am mostly a self-taught technician as I like to do my own independent research. But I’ve always been a fan of John Murphy’s work and books. Since John was part of the StockCharts team, this was a perfect match for me and EarningsBeats. From its very beginning, StockCharts has boasted a top-notch ChartSchool, providing FREE education, which I use myself from time to time. I’d encourage you to use it, if you haven’t already. There’s a wealth of information and education for both traders and investors. To some degree, EarningsBeats.com has a similar approach. While we charge for much of our market guidance, research, and education, we also provide plenty of FREE information to investors and traders seeking a better and more secure financial future. My Trading Places blog right here at StockCharts is a perfect example, as are my YouTube shows. We also have a FREE EB Digest at EarningsBeats where I produce an educational chart (and two paragraphs) 3x per week. Be sure to subscribe to that with your name and email address if you haven’t already.

In putting YOUR team, that YOU trust, together, I’d encourage you to start with StockCharts.com. I have worked with many of the contributors here at StockCharts and know many of them personally as well. Collectively, it’s a group with high character and integrity with education as a top priority. They provide a TON of free content and you should take advantage of it. Find those that you trust and employ similar strategies to your own, and build the rest of your team from there. In my mind, that’s where a team should start – those who provide education and do their own independent research. That also means IGNORING those that have an agenda, which I’d estimate is roughly 90% of the folks you’ll see on CNBC. We’ve had three (3!!!!!!!!) market crashes in my lifetime, which now spans more than six decades. How can you explain CNBC parading the same group of people across their channel that continue to provide HORRIBLE forecasts year in and year out? There are those that constantly spew a “CRASH” is coming. During my lifetime, the odds of one occurring is about 1 in 20 years. There’s definitely a core cast of “influencers” on CNBC and who knows what their agenda is. I just TURN IT OFF. It is so easy to be swayed when you hear over and over again how awful the economy is. How the debt level is out of control. How higher interest rates will crush the economy. (By the way, now I’m hearing from some folks how the Fed turning dovish is bearish for stocks, too!) You can’t make this stuff up. I’ve “learned” that when the market goes up and breadth is poor, it’s a signal that there’s little participation and we shouldn’t trust the advance. But when breadth is strong, it’s an extreme that marks a top. In other words, SELL if you ever look at breadth, no matter what it shows. Also, if you haven’t heard, a massive recession is coming. That helps to explain why money has been rotating heavily towards consumer discretionary (XLY) vs. consumer staples (XLP) and is currently at a 2023 high – I’m fluent in sarcasm, by the way:

Through all of my years of learning and research, the one chart that I love, perhaps more than any other, is the XLY:XLP ratio. It just makes perfect common sense, right? If our GDP is two-thirds consumer spending and the stock market is the best leading economic indicator, then wouldn’t following a ratio between the offensive consumer discretionary sector (which would presumably do much better in a strong or strengthening economy) and the defensive consumer staples sector just make absolute perfect sense. Look at the correlation coefficient between the S&P 500 and the XLY:XLP ratio in the bottom panel of the chart above. Strong positive correlation is represented by readings > +0.50 and strong inverse correlation is represented by readings < -0.50. This isn’t an opinion of mine. This is an absolute FACT and you can see it clearly on the chart. The XLY:XLP ratio can help us determine if we should expect a current trend in the S&P 500 to continue. It’s my favorite “sustainability” ratio. So when I hear analysts, or anyone for that matter, talk about an impending recession in 2024, I have to disagree. Sorry, not sorry. It helps me ignore all the worries on CNBC and have CONVICTION in my own beliefs.

Conviction matters.

On Monday, December 18th, at 4:30pm ET, I’ll be hosting an event, “The Stock Market & Interest Rates: What History Tells Us.” This is a chance to finish off 2023 by gaining more knowledge about the relationship between the direction of interest rates and the direction of U.S. stock prices. It’ll be one of the many key factors in 2024 stock market performance, so it’s a topic that everyone should understand now. This is a Members-Only event, but a 30-day FREE trial gets you a seat to the event and an opportunity to kick the tires of EarningsBeats.com.

For more information and to start your FREE 30-day trial, CLICK HERE. (Be sure to scroll to the bottom of the form for sign up)

Happy trading!

Tom

Tom Bowley

About the author:
Tom Bowley is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market.

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EB Weekly Market Report – Monday, November 20, 2023

Sample Report

Below is our latest Weekly Market Report (WMR), which is published on Sunday/Monday of every trading week. It’s unlike our Daily Market Report (DMR) as the WMR focuses almost exclusively on the Big Picture and is more designed for those with longer-term investing/trading horizons. Our DMR looks much more closely at current action, designed more for active traders.

I thank all of you that have followed my work here at StockCharts.com over the past 16 years and this sample report is just a small Thank You for your support! If you like the report below and would like to subscribe to our full service, we do offer a 30-day FREE trial and signing up now makes a lot of sense. Our Fall Special, which offers the absolute best price for our service, begins tomorrow and will last roughly through the end of November. If you take us up on our Trial Offer and enjoy our service, you can then subscribe using our BEST DEAL of the year.

Either way, ENJOY and Happy Thanksgiving!

Weekly Market Recap

Major Indices

We finally saw some relative strength out of small caps (IWM) and mid caps (MDY) last week. All of our major indices gained ground, but the IWM nearly tripled the NASDAQ 100 and simply acted much more bullishly after the tame October CPI report was released on Tuesday morning before the opening bell. That triggered a tsunami of buying on Tuesday. After a brief pullback, the small cap bulls were back out on Friday. I would treat the IWM as an uptrending ETF – until proven otherwise. Check out the chart, with two key support levels identified:

There’s still much work to do, but the IWM is at least beginning to show significant improvement, especially on the absolute price chart. The huge gap up on Tuesday now provides us excellent gap support at 174.23 and the rising 20-day EMA is currently at 172.17. Those are the two support levels to watch closely.

Sectors

Two sectors that had really struggled in 2023 due to higher interest rates were real estate (XLRE) and utilities (XLU). It made sense for these two to perform well when investors poured into bonds last week, sending the 10-year treasury yield ($TNX) plummeting. Consumer discretionary (XLY) had an excellent week as well. You’ll see below that 4 of the top 6 industry groups last week were in the consumer discretionary sector.

I generally define a daily uptrend as “price above the 20-day EMA and the 20-day EMA above the 50-day SMA”. Of our 11 sectors, XLB is on the verge of meeting this definition as it prepares for a golden cross (20-day EMA crossing above 50-day SMA). The only other two sectors not meeting this definition and still showing more work left on their charts are energy (XLE) and health care (XLV). Here are the two charts:

XLE:

The XLE printed a tail beneath recent price support on Thursday, then recovered to test its nemesis, the 20-day EMA. Currently, the XLE is caught between those two – price support near 82.50 and the 20-day EMA at 85.26. Let’s see which one breaks first. In a bull market, I give the edge to the XLE breaking back above the 20-day EMA.

XLV:

The XLV seems to be a bit further along in its recovery attempt. It currently resides right at key price and trendline resistance. A breakout would be a solid piece of technical evidence that the “correction bottom” is in for the XLV.

Top 10 Industries Last Week

Renewable energy ($DWCREE) jumped about 13% on Tuesday alone after the October CPI report was released. The 290-300 area has proven to be difficult short-term resistance, so let’s see if the group can power through that area this week:

In that resistance zone is gap resistance and multiple price attempts at a breakout, so clearing it would definitely improve the technical picture here, perhaps even switching the overall trend from downtrend to uptrend. Before you get too excited, however, please keep in mind that renewables have been lagging badly vs. the benchmark S&P 500. We’ve seen some improvement, but there’s little leadership. In other words, much of the current rebound can be attributed to very oversold conditions and a bounce, plus a very strong overall market. It’s the old Wall Street adage, “a rising tide lifts all boats”. In that bottom panel, breaking the relative downtrend is truly what this group needs.

Bottom 10 Industries Last Week

I find about half of the above industry groups to be bullish on their charts. Apparel retail ($DJUSRA) has been very strong since its early-June low and the recent selling appears to be a handle off of a cup:

The huge spike in volume likely was the result of Gap’s (GPS) massive volume, which accompanied a much-stronger-than-expected quarterly earnings report. The DJUSIB, DJUSRD, DJUSMF, and DJUSHN all were among the 10 biggest losers last week, but still show technical promise, in my opinion. The DJUSIB, in particular, looks solid, having broken to a 52-week high earlier this month and still trading well above its rising 20-day EMA.

Top 10 Stocks – S&P 500/NASDAQ 100

Bottom 10 Stocks – S&P 500/NASDAQ 100

Big Picture

We cleared yet another hurdle on the S&P 500 as we cleared the 4500 level. After reaching a high of just over 4600 in July and pulling back to 4103.78 on October 27th, the bulls are back in charge. The S&P 500 is now nearing its 2023 high, just 2% away. The recent recovery is just one more reason why I like to take a step back and view the “Big Picture”, much more easily recognizing the current secular bull market:

The bottom panel highlights the 240-month (20 year) rate of change (ROC). I like to look at this for perspective. While many bearish analysts believe we’ve run too far to the upside and have lots of downside ahead, this 240-month ROC tells me a completely different story. This ROC has come nowhere close to the highs we saw in the previous two secular bull markets. If anything, this suggests we could have much more upside ahead than any of us can imagine right now. It’s one reason why I believe the S&P 500 could triple over the next 8-10 years, before we hit the next secular bear market.

Sentiment

I look at two key sentiment readings – the Volatility Index ($VIX) and the equity-only put-call ratio ($CPCE). Others use surveys, but I don’t trust those. After all, wouldn’t you rather see what traders are doing with their money rather than their lips? Yeah, me too.

Volatility Index ($VIX)

The first thing to understand is that the VIX is a calculation of “expected volatility” ahead. The calculation is based on the pricing of short-term S&P options. I like to view this as my “market maker sentiment reading”. Market makers set the premiums that they require option holders to pay. If market makers are looking to protect themselves against volatile market action, they’ll put higher premiums on options. If we’re in a boring market environment (nearly always occurs in bullish market environments), premiums are much lower and indicative of little volatility ahead. Market makers are giving us a GREAT BIG CLUE as to where they see the market heading.

Typically, a VIX over 20 suggests a fairly high expectation of trouble ahead as when the VIX rises above 20, you really want to avoid taking any unnecessary risks on the long side. Instead, you want to hunker down. The higher the VIX level goes, the more volatile and scary the action can get. VIX readings above 30 usually require market capitulation before we get a more tradable market on the long side.

If the VIX is in the 17-20 range, I’m usually on high alert. If it’s falling in this range, it can a very bullish signal. If it’s rising in this range, however, and approaching 20, caution would be suggested as selling could escalate quickly. At this point, if I was long and wanted to stay long, I might consider a covered call strategy, if you’re familiar with options. You’ll get a nice premium and it’s a way to at least hedge a little against your long positions.

The most bullish environment is when the VIX is below 17 and declining. We’ve seen that recently. Here’s where the VIX currently stands:

Check out that first big spike in the VIX back in March. That should be ingrained in your mind. That’s what can happen when the VIX moves through 20 resistance and accelerates. The stock market took a tumble of roughly 250 points in one week. The October scare saw the VIX jump 50% in a couple weeks, clearing 20 and reaching a high just above 23. That coincided with another significant selloff as the S&P 500 again lost about 250 points.

Look at those thick red/blue directional lines in November, though. As the VIX came tumbling down, we had a massive market rally as fear began to dwindle. All of this occurred during what we already knew was THE most bullish period historically of the entire year. This is how we can put puzzle pieces together in the short-term to increase our probability of making great market calls.

Equity-Only Put-Call Ratio ($CPCE)

While the VIX is a market-maker-related sentiment signal, the CPCE tells us what the retail trader is doing with their money. Just keep in mind that when retail option traders all start to pile in on the same side of the trade, it usually ends in very ugly fashion for them. We’re looking for the “rubber band to stretch” significantly in either bullish or bearish fashion and we position ourselves on the opposite side, waiting for the “snap back”. In my experience, any time the 5-day SMA of the CPCE hits .75, extreme fear is building and we should begin looking for a market bottom. Sometimes this 5-day SMA reading can reach as high as .85-.90 before a bottom is reached, so this isn’t an exact science. The main point I’m making is that, if you’re shorting or trading equity puts, you need to understand that your profits could swiftly disintegrate once the 5-day SMA of the CPCE moves past .75.

Here’s a historical chart of the CPCE (5-day SMA) to illustrate how this works:

The low 5-day SMA readings below .54-.56 have been solid signals in marking short-term tops, while high 5-day readings above .75 have been excellent in providing us clues of market bottoms. The last reading was circled in red, because it occurred while the market was accelerating to the upside. This tells me that we still have PLENTY of doubters as we rally. I believe that’s a very bullish signal.

Inflation

On Tuesday morning, the October CPI report was released, followed by the October PPI report on Wednesday morning. Both reports continue to stress that inflation is FALLING and it has been consistently for over a year. The stock market LOVES this news and is now rising to be priced accordingly. Do you believe inflation remains a big problem? Keep in mind that the Fed is most interested in Core CPI, so below you’ll find a chart of the absolute monthly Core CPI numbers with two panels below. The first shows the annual Core CPI (12-month rate of change) and the second panel shows the 1-month rate of change (ROC) of Core CPI:

The annual rate is dropping every single month and is now back to 4%. We’re not at the Fed’s target rate of 2%, but the last four monthly CPI increases have been in the “normal range” for the past 30-40 years, between 0.5% and 0.3%. If inflation remains in this area, we’ll be approaching the Fed’s target inflation level by June 2023, which is when many analysts believe the Fed will start lowering interest rates to spark a slowing economy. It’s interesting how this inflation data lines up almost perfectly with that narrative.

Intermarket Analysis

In addition to following technical price action on our major indices, just like most technical analysts, I believe it’s extremely important to monitor key intermarket relationships as well. The two primary relationships for me are (1) XLY:XLP to watch the rotation between the more aggressive discretionary sector (XLY) and the more defensive staples sector (XLP), and (2) QQQ:SPY to observe the rotation between the more growth-oriented NASDAQ 100 and the more value-oriented S&P 500. The former is extremely important, because our GDP is comprised roughly of two-thirds consumer spending. Watching to see where these consumer dollars are going helps us determine whether investors are in a “risk on” or “risk off” mode. The former is bullish, while the latter is bearish.

So where do these two relationships stand today?

XLY:XLP

My analysis features this relationship “ignoring gaps” and “including gaps”. I believe the stock market is highly manipulated, especially at the opening bell. A gap down is a great way to “encourage” unsuspecting traders to sell and a gap up is a great way to “encourage” those same unsuspecting traders to buy. The top panel ignores that opening bell activity and focuses ONLY on the rotation during the trading day. You can’t plot this on a chart with regular data. In order get this intraday rotation, you must keep a User-Defined Index at StockCharts, which is exactly what I do. What we saw during much of the correction was a weak S&P 500, but a strengthening XLY:XLP. It was a rather important signal that the S&P 500 selling would not last. Now we see the result as our major indices scream higher once again.

QQQ:SPY

While the S&P 500 has yet to break above its July high near 4600, this ratio has broken out whether we include or ignore gaps. Again, it’s a bullish signal as the big Wall Street firms buy into the more aggressive growth index, while simultaneously appearing on CNBC to spread indecision, fear, and sometimes, outright doom and gloom. Follow the charts, not the lips on CNBC.

Trade Setup

I discuss potential trade setups here from a LONG-TERM perspective. These are not trades where you’re hoping to jump in, make 10-15%, then sell and move on to something else. Instead, I focus here on stocks that generally have solid long-term track records. Entering at the current level might make sense due to various factors.

Today, I want to highlight Seagate Technology Holdings (STX) as it has performed better than the S&P 500 over time and it also has performed much better than one of its primary competitors, Western Digital Corp (WDC). I also like the recent technical breakout on STX after languishing mostly during the 2022 cyclical bear market and the recent market correction from July to October:

Another positive with STX is that it pays a healthy $2.80 dividend ($.70 per quarter), which results in a 3.69% dividend yield, not a bad addition to the solid long-term capital appreciation.

Looking Ahead

Upcoming Earnings:

Earnings season is slowing down now and most big companies with calendar quarter ends (March, June, September, and December) have already reported their quarterly results. There are a few, however, that do report in other months and you’ll see below that NVIDIA Corp (NVDA) is one of those. The following earnings reports (market cap in parenthesis) are, in my opinion, at least relatively significant and worth watching. This is NOT a list of ALL companies reporting this week, so please be sure to check for earnings of any companies that you own or add:

  • Monday: A ($33 billion), KEYS ($24 billion), ZM ($19 billion)
  • Tuesday: NVDA ($1.2 trillion), LOW ($117 million), ADI ($90 billion)
  • Wednesday: DE ($109 billion)
  • Thursday: None – Market Closed for Thanksgiving Day Holiday
  • Friday: None – Market Closes Early at 1pm ET

Key Economic Reports:

  • Monday: Leading indicators
  • Tuesday: Existing home sales, FOMC minutes
  • Wednesday: Initial jobless claims, durable goods, consumer sentiment
  • Thursday: None – Market Closed for Thanksgiving Day Holiday
  • Friday: None – Market Closes Early at 1pm ET

Historical Data

I’m a true stock market historian. I am absolutely PASSIONATE about studying stock market history to provide us more clues about likely stock market direction. While I don’t use history as a primary indicator, I’m always very aware of it as a secondary indicator. I love it when history lines up with all my other signals, providing me much more confidence to make particular trades.

Each week, I’ll provide you the average annualized returns for each calendar day and by index. Here are the historical numbers for this week:

S&P 500

  • November 20: -32.39%
  • November 21: +55.64%
  • November 22: -1.21%
  • November 23: +49.61%
  • November 24: +127.98%

NASDAQ

  • November 20: -90.10%
  • November 21: +74.67%
  • November 22: -17.21%
  • November 23: +34.13%
  • November 24: +230.95%

Russell 2000

  • November 20: -72.94%
  • November 21: +71.46%
  • November 22: -9.82%
  • November 23: +63.10%
  • November 24: +255.15%

The S&P 500 data dates back to 1950, while the NASDAQ and Russell 2000 information date back to 1971 and 1987, respectively.

We are now in the most bullish period of the calendar year. The close on October 27th through the close on January 18th is THE ABSOLUTE BEST TIME OF THE YEAR FOR U.S. EQUITIES – HISTORICALLY SPEAKING. Last week was an “ok” period for equities, but the upcoming week typically sees much more historically-bullish action and this bullishness extends through the first week of December.

Final Thoughts

As we move into the Thanksgiving holiday season, let’s keep a few things in mind:

  1. Historical bullishness should not be ignored. 73 years of data on the S&P 500 tell us that NOW is the best time of the calendar year to be bullish and to be long. Fight this historical bullishness at your own risk.
  2. The 10-year treasury yield ($TNX) has lost neckline support in a topping head & shoulders pattern, with its initial measurement pegged near the 4.10% level
  3. Key intermarket relationships point to the sustainability of the current S&P 500 rally; 4600 is the next significant test, with a breakout likely sending us higher to test the all-time high near 4820
  4. NVIDIA Corp (NVDA) reports its earnings on Tuesday after the bell; this will be significant not only for NVDA, but also for the entire semiconductor group ($DJUSSC). I expect big numbers from NVDA, but it has run a lot in November, now testing critical price resistance at 500.
  5. Small caps (IWM) have shown improvement, but continue to watch the KRE (regional banking ETF) and XBI (widely-diversified biotech ETF) for clues about future relative strength; these are the two industry groups that most heavily influence IWM performance.
  6. As I pointed out last week, TG Therapeutics (TGTX) is a strong short squeeze candidate, with over 27% of its float short. The closing breakout level of 11.88 provided was cleared on Friday’s close and we now see the result as TGTX is up more than 5.5% at my last look. Volume is picking up and there’s little overhead price resistance. Shorts could be covering big time later today. Wildly accelerating volume will be the major clue that a significant short squeeze is, in fact, underway. Short squeeze trades are ALWAYS extremely risky, but this one has the potential to fly this week.
  7. I want to wish everyone a very happy Thanksgiving holiday weekend. If you’re traveling to be with friends and family, please be safe!

Feedback

If you’d like to share your thoughts on our Weekly Market Report, positive or negative, you can reach us at “[email protected]”.

Happy trading!

Tom

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Holiday Shopping Bonanza: Retail Stocks You Need to Watch

KEY

TAKEAWAYS

  • Since holiday shopping season is here it could be a good time to add some retail stocks to your portfolio
  • AMZN, WMT, COST, and TGT could be potential stocks to add to your portfolio as holiday shopping begins
  • Set alerts for these stocks so you can enter at opportune levels

The holiday season and discretionary spending can be synonymous, ringing in a boom in retail profits. And with Halloween in the rearview mirror, it’s time to strategize a few killer plays in the retail arena.

Perhaps it’s no coincidence that, upon running a StockCharts Technical Rankings (SCTR) report using the US Industries menu, the Dow Jones US Broadline Retail Index ($DJUSRB) emerged among the top outperformers with an impressive score of 98.9 (see below). The holiday shopping season has started, so it’s worth looking more closely at this industry. Retailers in this industry have diverse products and services that work across several sectors.

CHART 1: US INDUSTRIES SCTR RANKING. $DJUSRB ranked second in the US Industries category.Chart source: StockCharts.com. For educational purposes.

CHART 2: DAILY CHART OF $DJUSRB. The index is currently pulling back, but shows several support levels should the bounce fail to break above the most recent swing.Chart source: StockCharts.com. For educational purposes.

The index bounced off the 38.2% Fibonacci retracement level from the December 2022 low to the September 2023 high. It’s outperforming the S&P 500 index ($SPX) by over 6% and looks like it’s on the verge of moving even higher.

So, How Might Inflation Affect Holiday Spending?

According to recent consumer spending reports, cash is flowing out of pockets and into the hands of retailers despite inflation and mounting household debt. “Borrow and spend freely” seems to be the main theme as we head toward the end of 2023.

Still, you must consider the toll that inflation may eventually have on consumers’ spending pockets, especially when it comes time to play Santa Claus. And that makes the Dow Jones US Broadline Retailers Index particularly sturdy this holiday season.

In 2022, AMZN took the largest share of holiday shopping (around 41%). It’s also a large component of the $DJUSRB. Looking at the daily chart of AMZN below, you can see that the stock is outperforming the S&P 500 index ($SPX) by about 29%. It also has a strong SCTR score.

CHART 3: DAILY CHART OF AMZN. The recent slide in AMZN’s stock price suggests that buying momentum may be slowing.Chart source: StockCharts.com. For educational purposes.

Though AMZN has pulled back, it appears to be clawing to challenge its September high. However, there’s a deceleration in buying pressure, and you can view this more clearly if you look at the Chaikin Money Flow (CMF) in the lower chart panel. AMZN bounced strongly off the 200-day SMA line and broke above its most recent swing high of 134.50. It will have to challenge its 2023 high of 145.85 if its uptrend is to remain valid.

Let’s look at some of the other US large retailers, starting with Walmart (WMT).

CHART 4: DAILY CHART OF WMT. The stock price is about to challenge its all-time high, and the CMF shows that buying pressure is still strong.Chart source: StockCharts.com. For educational purposes.

WMT, too, is outperforming the S&P 500, and the buying pressure, as exhibited by the CMF, concurs with this reading in momentum. Though WMT’s price appears to be pulling back, it has several levels of support, including its 100-day and 200-day SMAs before its 50% Fib retracement. If WMT breaks above 165.75, it will have reached record highs, and right now, it looks poised to break above that level.

Like WMT, Costco (COST) benefits from a diverse suite of private-label products and economies of scale, allowing it to control costs better and maximize profits.

CHART 5: DAILY CHART OF COST. Investors seem indecisive about accumulating CSCO stock.Chart source: StockCharts.com. For educational purposes.

Technically, COST is experiencing higher levels of volatility as it approaches its all-time high above 600. It also outperformed the S&P 500, though its relative performance exhibits slight indecision. Its CMF reading is positive, but shows divergence over the last month (see the flat blue line on the CMF and compare it to Costco’s rising trajectory, leading to its pullback and the following fluctuations).

Although COST appears to have bounced off its 100-day SMA, if it falls further, it has plenty of technical support between 510 and 530, where the 38.2% and 50% Fib retracements are clustered along with the 200-day SMA.

The stock price for Target (TGT) presents a different scenario. Amid a high-interest rate environment, mounting theft, and, particularly, a strong consumer backlash against certain products, TGT shows the most epic falling knife scenario (see chart below) among the largest retail giants. Still, it’s an arguably solid company with a diverse portfolio of cost-competitive offerings.

CHART 6: DAILY CHART OF TGT. Ouch! However, the selling pressure looks like it’s drying up. If it breaks out to the upside, its reversal faces many headwinds.Chart source: StockCharts.com. For educational purposes.

It’s difficult to predict if the stock price has bottomed, but certain levels can help you gauge its advance and momentum once it begins to show signs of recovery. And the holiday season may provide the catalyst for TGT’s upside reversal.

TGT is caught within tight consolidation between roughly 106 and 113.50 after a 42% plunge from its 2023 high of 177.50. Its SCTR score of 13 and -38% underperformance against the S&P 500 underscore the severity of TGT’s drop. Any early signs of a recovery would begin with a close above resistance at 113.50. The CMF indicator paints a slightly optimistic picture of this likely upside break as selling pressure recedes, and buying activity sends the indicator above the zero line for the first time in four months. 

But even if TGT bulls attempt to rally the stock, it has multiple resistance levels. Drawing a Fibonacci retracement from its 2023 peak to its lowest point, you can expect resistance between 132.50 (38.2%) and 140 (50%), a range in which the 200-day SMA will likely be met. Also, 125 and 137.50, the bottom and top of a previous rectangle formation, will likely provide additional resistance, adding to TGT’s technical headwinds (not to mention the consumer-driven headwinds that played a significant part in its near-term demise). 

Actionable Levels

AMZN, WMT, and COST are all prone to pullbacks, while TGT awaits signs of a potential reversal. Each stock presents different technical scenarios, momentum profiles, and potential support levels. Where you choose to buy (if you’re bullish) depends on your level of aggressiveness and means of (bullish) confirmation. Fibonacci and SMA levels (as well as swing points) also present different stop-loss scenarios that can be trailed should you find yourself on the right side of the market.

The Bottom Line

As we enter the holiday season, retail stocks will likely take center stage. The Dow Jones US Broadline Retail Index ($DJUSRB) shines with a robust SCTR score. Its biggest component, Amazon (AMZN) faces challenges. Other large retailers show different scenarios—Walmart’s gaining ground, Costco is wavering, and Target is eyeing a comeback. 

Add these four retail stocks to your StockCharts ChartLists and set alerts at the possible support and resistance levels shown in the above charts.


Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

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Don’t Even Think About Investing Without Addressing These 10 Essentials (Part 1: Essentials #1 – #5)

We investors are frequently guilty of hearing only what we want to hear. The justification often being “that doesn’t apply to me.” Or my other favorite line, “Oh, I don’t do that.” In my previous blog — a tribute to William J. O’Neil, — I said that in the near future I’d share my specific takeaways from all his seminars I attended and his books I read. I absorbed this material from O’Neil over many decades, and in reviewing my extensive notes, I freely admit to paraphrasing his insights.

As with so many instances in life, O’Neil may have implied one lesson and I inferred something slightly different. Nevertheless, this is my collection of useful investing essentials that all of us need to remember and that all novices must adopt sooner rather than later. Not just for the betterment of our own portfolios, but for the crucial responsibility of passing the investment management baton to the next generation. Without this baton pass, your legacy dies. That may sound brutal, but it’s entirely truthful.

1. SUCCESSFUL INVESTING CAN BE LEARNED

This is a fact, and I’ll offer you proof. The Market Wizard, Richard Dennis, set out to prove this point by making a wager with his business partner. He won! He proved it could be done to the tune of $175 million. You should read Wikipedia’s biography of Dennis. He turned $1,600 into $350 million and then famously taught his system to a small group of investing recruits who he labeled “the Turtles.” In five years, his novice Turtle investors produced an aggregate profit of $175 million. The conclusion? Yes, you can learn to be a consistently profitable investor, too. 

2. START EARLY — DON’T PUT OFF INVESTING

In my over 25 years teaching investors, I consistently heard the same regret over and over again, “gosh, if only I had started investing sooner.” Be it Buffett, O’Neil or Bogle, they all applaud the magic of compounding and preach the gospel of starting early. You’ve all seen the seemingly unbelievable numbers. Young people who start investing almost certainly will be able to retire in their fifties. And even for those of you already 50, investing $15,000 annually and letting it grow at a reasonable market rate of 8% will reap a nest egg of $440,000 by the time you’re 65. But my God — do the math if you start at 25 years old! I’d present you with the number, but you probably wouldn’t believe me. Remember the importance of the baton pass. Teach young people to start investing early. Don’t be like 64 year-old Ned, a former student of mine who said he’d just begun doing some financial planning and discovered he could retire by 65 — but only for 45 minutes. Make it happen before you end up like him! Stop waiting for inspiration as all you are doing is feeding your procrastination.

3. THE WORLD’S GREATEST HOBBY WILL REWARD YOU

I began investing as a young man and then continued through my entire career as an entrepreneur. It began as a hobby — albeit a serious hobby. At the time, my assets were managed by a professional firm. When I transitioned to making my hobby a full-time avocation, I had already been a very serious student of investing for many years. Unlike some lazier novice investors who flame out early and quickly ( for some that may be a blessing in disguise) I continued to grow and succeed by bumping, grinding and persevering. If we commit ourselves to do what needs to be done and thereby grow as investors, the market will reward us as long as we’re willing to apply ourselves. The University of Wall Street will extract its tuition, but graduation pays immense dividends. It’s worth it! Investing Hell is reserved for “middle earth” which is where mediocrity resides. Far too many investors are by their own design sentenced to a life of investing mediocrity. Embrace this wonderful hobby! I believe author and professor Stephen R.Covey puts it nicely. “Sow a thought, and you reap an act; sow an act, and you reap a habit; sow a character, and you reap a destiny.” As an investor, growth is an obligation. The alternative is not financially attractive. Make the commitment.

4. THE METHODOLOGY OF POTHOLES

It might seem counterintuitive at first. It’s not what a novice investor wants to hear, but you’ll have far far more assets in your pocket over the long term if you first focus on what you should NOT do as an investor instead of trying to find the Holy Grail of stock trading methodologies. Once again, take heed of what Buffett and other Marker Wizards have advised. They will tell you that you can indeed outperform the market and actually possess mediocre investing skills — but there’s the big if — if you avoid falling into the most common potholes and don’t make all the usual mistakes and blunders that investors are prone to do over and over again. The reality is that the Methodology of Potholes will trump the Methodology of Investing, so to speak!

5. SIMPLE BEATS COMPLEX

Many investors have multiple university degrees, high IQs, and very successful careers. Generally, they are cerebral folks who understand complex stuff. That’s why they’re attracted to the stock markets and investing in the first place. Here’s the conundrum — one that I was myself was guilty of initially. Increased complexity is inversely related to profits. Simplicity (within reason) produces profits and clobbers complexity in most instances. Steve Jobs had it absolutely correct when he said, “Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.” And you have to admit, Steve Jobs moved mountains. You can as well.

Till the next blog then, when I’ll present you investing essentials #6 through #10.

Trade well; trade with discipline!

Gatis Roze, MBA, CMT

StockMarketMastery.com

Gatis Roze

About the author:
Gatis Roze, MBA, CMT, is a veteran full-time stock market investor who has traded his own account since 1989 unburdened by the distraction of clients. He holds an MBA from the Stanford Graduate School of Business, is a past president of the Technical Securities Analysts Association (TSAA), and is a Chartered Market Technician (CMT). After several successful entrepreneurial business ventures, Gatis retired in his early 40s to focus on investing in the financial markets. With consistent success as a stock market trader, he began teaching investments at the post-college level in 2000 and continues to do so today.
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Stay Ahead Of The Curve To Make More Money

Everyone’s a stock picker. And to be quite honest, everyone gets hot and everyone gets cold. Every trader has to find strategies that work for him/her and then hit the “rinse and repeat” button. Personally, I’ve found three keys that have helped me beat the major indices, particularly the S&P 500, over the years. They are:

  1. Get the market direction right
  2. Follow rotation and relative strength
  3. Stick with leaders

That might seem like a lot, but it’s really not.

Getting Market Direction Right

This one requires market experience, knowledge, and research, but there are several tried and true techniques to help us in this regard. (Hint: It’s not watching CNBC and Jim Cramer.) I always talk about perspective, because WAY too many folks, both Wall Street professionals and retail traders, get so caught up in the NOW that they can’t comprehend what’s happening in the Big Picture. Start with the FACT that the stock market goes up a whole lot more than it goes down, so get all the perma-bear influencers out of your life. Seriously, they’ll ruin your perspective. Surround yourself with realists, those who are primarily bullish, but remain objective when evaluating current technical, fundamental, and historical indications. You MUST understand the role that sentiment plays. When selling accelerates and pain grows, irrational selling and market behavior will ultimately mark critical bottoms. I have found sentiment to be my absolute best bottom indicator.

If you study history, you’ll also understand that capturing the most bullish advances are the best opportunities for a financially-secure future. Once those rallies have ended, so too has the investment opportunity.

There are plenty of signals that the stock market provides us BEFORE or during major rallies. Sector rotation, positive divergences, and extreme bearish sentiment are perhaps the three most reliable, in my opinion, and I have my own strategies on how to use those. Recently, however, was the breakout in transportation stocks ($TRAN) and that signal is UNMISTAKEABLE. There is only one reason why transportation stocks go higher – economic conditions are strengthening and more goods will be delivered (or Wall Street is anticipating economic strengthening). Don’t believe me, believe the charts. Here’s what happens to the S&P 500 when transports break out to new highs or above periods of consolidation/selling:

Listen, there is NEVER a guarantee that the stock market will go higher. If you’re looking for that, then stop investing in stocks. But do some research (or follow ours at EarningsBeats.com) and invest knowing that the odds are on your side. Many times, when I call market tops or market bottoms, I do so based on the shift in market risk vs. market reward. I don’t guarantee my calls. I can’t. But if you follow my work, then you know I’m convicted. I don’t waffle. My signals are my signals and I follow them. I don’t care what Jim Cramer says. I certainly don’t care what all the market influencers (ooops, meant to say market analysts) are saying on CNBC. It’s almost all a pile of garbage to consume our time so they can sell ads. And what occupies our mental space? Fear. If you don’t believe we’re all manipulated by the media, then we can’t be friends. (just kidding)

Follow Rotation and Relative Strength

Let’s look at the market top at the beginning of 2022:

I think the continuing weekly negative divergence was clear (pink lines). But the change in relative strength was eye-popping. There’s no problem with a pullback in these relative ratios IF the market is also pulling back. Profit taking will show up that way. But when you see final highs accompanied with massive rotation into more defensive areas, you need to take that very seriously, which I did.

Now let’s look at the exact same chart in mid-June 2022, when I called for a potential market bottom:

Price moved substantially lower from May 2022 to June 2022, but the pace of relative weakness began to slow, even turn higher in many growth ratios (IWF:IWD is the one I provided in this example, but there were others). I also wrote many times in mid-2022 about how manipulation was showing that Wall Street was accumulating heavily starting during the May 2022 to June 2022 period. Sentiment was beginning to “reset” as well. History now has proven me correct in calling for higher U.S. equity prices from that June 2022 low and making calls like that one is how you build wealth. But you have to be willing to “think differently” and not simply follow all the bearish talk on CNBC.

Stick with Leaders

When 2023 opened up with narrow leadership from the key, high-market-cap stocks on the NASDAQ 100, Wall Street eschewed that early surge. I love technical analysis and I believe it’s AWESOME to help us trade during uptrends and downtrends. But I believe intermarket relationships, sentiment, and good ole perspective are much better in helping us locate market tops and market bottoms. Throughout much of the current bull market move, the naysayers have been everywhere, saying the stock market couldn’t go higher, because of “this” or “that”. I said “stay the course, we’re going higher”. To this day, I still will never understand why those who follow market-cap weighted indices grow bearish when the highest market-cap leaders outperform and send our indices higher. What if “breadth” had been great, but these mega-cap leaders were left behind? Would everyone have grown bullish? I doubt it. Personally, I believe that once the majority of folks develop a bearish mindset, NOTHING MATTERS. They’re bearish no matter what the market is doing and what’s leading. That’s why at the beginning of 2022 I said that sentiment needed to “reset” and now I hope everyone can appreciate what’s necessary to make that happen.

The truth is that at nearly every bottom, the leaders are bought first. Semiconductors ($DJUSSC) are historical leaders and NVIDIA Corp (NVDA) has to be considered one of the best stocks in this space. Check out NVDA’s breakout in late 2022, followed by a quick retest, then an explosion higher:

Trading smarter and better and, ultimately, carving out a more secure financial future is about RESEARCH and EDUCATION. We are never satisfied at EarningsBeats.com. I feel like I need to learn something new about the stock market every day I wake up. We also have to deal with an evolving market. Economic changes, interest rate outlooks, profit projections, geopolitical concerns, management issues, political policies, and the like, all play a role in shaping and re-shaping our stock market landscape. We MUST change with it and be open-minded to the possibility that things will play out differently than the way we believe today. But just as important, we must always keep a healthy dose of perspective. While things do constantly change in the short- to intermediate-term, the Big Picture generally remains the same. It’s a balancing act and it’s up to us to get it right. No one cares more about your financial future than you. Always remember that.

In an effort to constantly engage with our EarningsBeats.com community, we pass along our experience, knowledge, and research via our 3x per week EB Digest newsletter. The subscription cost is ZERO and there’s no credit card required. I’d like to provide you with a “Money Flows” e-book just for subscribing to our EB Digest. You won’t believe the impact that money flows has on stock market performance. CLICK HERE and then hit the “Download” button. You’ll be prompted to provide your name and email address. From there, we’ll immediately send you this FREE Money Flows report and begin sending you our EB Digest every Monday, Wednesday, and Friday. You may unsubscribe at any time.

Happy trading!

Tom

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How To Benefit From a Big Rotation in Asian Markets

It’s been a while since we discussed international stock markets.

Above is the Relative Rotation Graph that shows the rotation for a group of international stock market indices against $DJW, The Dow Jones Global Index.

Looking at this chart I see two big(ger) rotations that are probably worth tracking and possibly trading.

US vs Europe

The first one is the relationship between the US and Europe. On the chart above the tails for $SPX and $E1DOW are a bit covered by other markets so I highlighted them in the RRG below to better see their current rotations.

After a period of outperformance, the European market(s) have now turned down into the weakening quadrant where the tail stabilized and started to move lower on the JdK RS-Ratio scale. The length of the tail indicates that the loss of relative momentum has been quite powerful so far.

The S&P on the other hand, has rotated from lagging into improving and has recently crossed over into the leading quadrant again. The tail is a little shorter than for $E1DOW and it is closer to the benchmark but that is primarily because of the heavier weight of the US markets in the DJ Global index.

There is still a chance that Europe will curl back up while the US rolls over. Which would essentially mean that the recent rotations have only been a pause in the outperformance of Europe over the US.

However, based on the individual charts for both markets that seems to be the less likely scenario.

USA

The S&P is on its way to breaking above its previous high at the moment which, in itself, is already a good sign. But more importantly, the relative strength line against The DJ Global index is solidly moving higher indicating a relative uptrend against the world.

Europe

The European index, on the other hand, has just bounced off overhead resistance around 380. This has caused the RS-Line to start rolling over which is now pushing the RRG-Lines lower.

Not only from a price perspective is Europe now lagging behind the US but also in relative strength against the world. Both markets are at opposite trajectories, and these sorts of situations always provide good trading opportunities.

A straight comparison between $SPX and $E1DOW on a daily chart highlights the improvement of the US over Europe in even more detail.

Japan vs Hong Kong

The second major rotation that I see on the RRG for world indices is the one between Japan and Hong Kong. These tails are well visible on the RG at the top as they are further away from the benchmark and the clutter of the other markets.

The RRG below zooms in on the rotation between these two Asian markets.

The opposite rotation is clearly visible and the length of the tails indicates the there is quite some power behind both moves.

Three weeks the tails crossed over from left to right and v.v. confirming the change of trend.

Japan

The Japane Nikkei Index is breaking beyond a major overhead resistance level at the moment. It already looks pretty impressive on the chart above, but when we change the chart to monthly and show more history, things are getting even more interesting.

Not only are Japanese stocks pushing to the highest level in more than two years. This break also opens up the way for a test of the all-time high for the Nikkei index. And unlike many other markets, this all-time-high was not set in the last 3-4 years but more than two decades ago.

And also, don’t be fooled by the log scale on this chart. The level of the 1990 peak is around 39.000. From current levels, that means an upside potential of around 25%.

This break also, at the same time, limits the downside risk as the previous horizontal resistance level can now be expected to return as support in case of setbacks.

Hong Kong

How different are things looking for the Hang-Seng index…

This market just convincingly dropped below its previous low, which opened up the way for a further decline toward the 2022 low near 15.000. From current levels, that means around 20% downside while the upside is now capped at the breakout level near 19.000.

How To Play

Exposure to these international stock markets can easily be created through ETFs that are quoted on US exchanges (in USD). Two widely used ETFs are EWJ for Japan and EWH for Hong Kong. As long as you realize that by using an ETF quoted in USD to trade a market that is traded in another currency implies a currency risk in your portfolio, you’ll be fine.

The chart below clearly shows that the price development for EWJ is quite different from $NIKK (which is what EWJ is tracking)

The top chart shows the ratio between $NIKK and EWJ. The lower chart shows the $USDJPY exchange rate. As you can see, that $USDJPY exchange rate pretty much entirely explains the difference between the $NIKK cash index in JPY and EWJ in USD.

The problem with buying EWJ is that you will also get a long position in JPY against USD which is not a preferred position at the moment as USD/JPY has just broken important resistance levels and seems to be underway for a further rise.

So from a portfolio management perspective, this is a force to be aware of as it has a negative effect at the moment.

For EWH, the impact is negligible as the $USDHKD exchange rate is pegged and hardly fluctuates.

As the expected fluctuations in the underlying markets ($NIKK and $HSI) are pretty significant, the potential profit from the directional moves in these stock markets will likely offset the drag from the exchange rate.

Here is the chart of EWJ in the top half and the ratio EWJ:EWH in the bottom half.

#StayAlert, –Julius


Julius de Kempenaer
Senior Technical Analyst, StockCharts.com
CreatorRelative Rotation Graphs
FounderRRG Research
Host ofSector Spotlight

Please find my handles for social media channels under the Bio below.

Feedback, comments or questions are welcome at [email protected]. I cannot promise to respond to each and every message, but I will certainly read them and, where reasonably possible, use the feedback and comments or answer questions.

To discuss RRG with me on S.C.A.N., tag me using the handle Julius_RRG.

RRG, Relative Rotation Graphs, JdK RS-Ratio, and JdK RS-Momentum are registered trademarks of RRG Research.

Julius de Kempenaer

About the author:
Julius de Kempenaer is the creator of Relative Rotation Graphs™. This unique method to visualize relative strength within a universe of securities was first launched on Bloomberg professional services terminals in January of 2011 and was released on StockCharts.com in July of 2014.

After graduating from the Dutch Royal Military Academy, Julius served in the Dutch Air Force in multiple officer ranks. He retired from the military as a captain in 1990 to enter the financial industry as a portfolio manager for Equity & Law (now part of AXA Investment Managers).
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