It’s not surprising traders and investors are hesitant to put new capital into the equity market given the recent strong rebound that has, for example, just pushed the Nasdaq back into positive territory for the year. For more see page 1. Sure, many growth stocks are reaching well advanced levels, at least in the short-term, but I don’t see a lot of technical evidence yet that the uptrends are reversing.

What levels should you watch for signs that the rally is either extending or beginning to stall? The Standard & Poor’s 500 index (SPX) itself is at an interesting crossroad heading into next week, with last week’s highs at 2954. The 62% retracement level (from the low) between 2934 and 3002, the declining 200-dma, is an important resistance band that will need to be surpassed to keep the uptrend intact.

Conversely, this past week’s lows are an important near-term technical support level, given it lines up with the 50% retracement of the 1Q sell-off at 2792. Our expectation is that pullbacks, when and if they occur, are likely to be relatively shallow. I’d also highlight that should we see a pullback, there is considerable support for the S&P between its 50-dma (2730) and the rising 200-week moving average at 2660.

So what should an investor do now? I continue to favor a barbell strategy with exposure to both secular growth stocks and cyclical stocks while reducing exposure to safety stocks such as utilities. In this space last week, I made the case why an investor should consider adding some high beta cyclicals to a portfolio with a view through 2020 into 2021. On the growth side, I am highlighting Alibaba (BABA) this week that is just bottoming at support at its 200-day moving average.

Favoring Barbell Strategy Using Growth and Cyclical Stocks

This is an attractive entry point in my opinion, particularly given so many other growth stocks in the US, such as AMZN and NFLX, have already surged to new highs. BABA is not only timely from a price standpoint, its weekly momentum in the top panel, which is a helpful tool to time 1-2 quarter shifts, is just turning up from oversold levels. Lastly, relative performance versus the SPX in the bottom panel remains in an uptrend which I view as bullish.

Bottom line: Accumulate BABA at current levels.

Figure: Weekly Sector Review
Source: FS Insight, Factset

Favoring Barbell Strategy Using Growth and Cyclical Stocks

Figure: Best and worst performance sectors over past 3 months

Favoring Barbell Strategy Using Growth and Cyclical Stocks
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