In a Hot Market Laggards CSCO, NATI Look to Perk Up
The market is hot, hot, hot. Should you be worried? Not if you are long term investor.
Short-term, on the other hand, could be a little bumpy, next month in particular.
The weekly market momentum is overbought (relative strength index > 75). Standard & Poor’s 500 Index price trends are well advanced above widely followed metrics such as the 50- and 200-day moving averages. Weekly momentum indicators, which track 1-2 quarter shifts, are in overbought territory, raising concerns that a peak is imminent.
On the one hand, I agree that many stocks are simply not timely to be adding new capital. While I would definitely not ignore the risk of a pullback, I would also point out that these high momentum readings have not historically signaled an imminent correction. For the record, there have been 59 instances of weekly RSI climbing above 75 since June of 1950, but the interesting point is that the S&P was higher 74% of the time 10-weeks later by an average of 2.16% and 76% of the time 20-weeks later by an average of 4.86%. That doesn’t mean we don’t have a pullback in between.
These factors don’t reduce the risk of a correction but they do reinforce the technical adage that strong trending markets often remain overbought for extended periods.
What should an investor do given market leading stocks such as Apple (AAPL) is up 86%, yes 86%, from June lows, and Microsoft (MSFT) 40% over the same time.
Frankly, I don’t see these stocks as the type of chart profiles to be chasing at this point.
Instead, timely ideas are stocks beginning to bottom near long-term support and reverse price and relative performance trends that have been in place 2018-2019.
There is always the risk these are lagging for a (fundamental) reason. However, I view these stocks as timely new long candidates as part of the barbell portfolio strategy I’ve been recommending that includes strong trending growth stocks as core holdings with oversold/bottoming contrarian ideas as satellite positions.
This week’s charts features Cisco Systems (CSCO) and National Instrument (NATI) are two examples of cyclical laggards in the early stages of bottoming. They should benefit from broader cyclical rebound I’ve been highlighting that dovetails well with Tom Lee’s bullish fundamental strategy view. (Page 3.) In addition both screen positively on the earnings revision model run by Brian Rauscher, our new head of Global Portfolio Strategy and Asset Allocation. Both stocks have corrected or pulled back through most of 2018-2019 and are bottoming near long-term support and in the early stages of reversing both price and relative performance downtrends. I discuss my market view, CSCO, NATI and a third stock, STZ, more in depth in this past Thursday’s CNBC Fast Monday interview, which you can see here.
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