Market breadth expanding as 8 of 11 sectors above 20dma (vs 2 last month). 4 reasons "fresh capital” should invest in Industrials. 17 stock ideas. Array ( [cookie] => 3e4bdb-4ec9f5-a66e63-761716-d3bbd6 [current_usage] => 1 [max_usage] => 2 [current_usage_crypto] => 0 [max_usage_crypto] => 2 [lock] => [message] => [error] => [active_member] => 0 [subscriber] => 0 [role] => [visitor_id] => 0 [reason] => Usage under limits [method] => ) 1 and can accesss 1

________________________________________________

Today’s First Word will include a short video update. Please click below to view:

As we move into the second week of June, our confidence that S&P 500 will gain >20% in 2023 has increased. The decisive upside breakout last week helps, as are signs that inflationary pressures are easing (May jobs report wages). To me, 3 things will be key over the next month and all of these will have an impact (of sorts) on our thesis:

• First, May CPI (released June 13th) is critical, and as of this writing, core CPI MoM <0.4% and YoY <5.5% would strengthen the case for a Fed pause (inflation falling). The rate of change matters as much as the level (too high).
• Second, will the Fed tolerate the recent easing of financial conditions (FCI) and rise in FAANG? In our view, FAANG via AI and labor substitution are solving wage inflation pressures (longer term), so it would be at the opposing end if the Fed wanted to end the rise of FAANG. Sort of, since FAANG will still invest in such products META -1.70%  AMZN -2.76%  AMD -2.92%  AAPL -0.13%  NFLX -2.40%  NVDA -3.67%  GOOGL -2.75%  TSLA -4.60%
• Third, we believe market breadth is notably expanding in the past week. 8 of 11 sectors (GICS Level 1) are now trading >20 dma (daily moving avg). We view P/20dma as a sign of trend and now 8 of 11 sectors are in positive trend. 6 of 11 have the 20dma > 200dma, another sign of positive trend.
• On this last point, contrary to the “Bear”-istas, market breadth surely seems to be expanding solidly at the moment. This is a positive set up in our view. For the first 5 months of 2023, FAANG was doing the heavy lifting for the market. Now it looks like the rest of the S&P 500 is responding to falling inflationary pressures, possible easing FCI and overall improving market dynamics.
• One would think this has convinced institutional investors to become more constructive. The latest CFTC futures positioning shows institutional investors increased their short positioning by +7.4% last week (5/30). Yup. In the face of a market rally, an additional 30,000 S&P 500 futures contracts were shorted and now represents 17.4% of all open interest. This is essentially the largest short position ever. Does this mean stocks could see a further meltup? Maybe.

STRATEGY: 4 reasons the case for Industrials is strengthening, but keeping an eye on May CPI (June 13th)

We realize the question on many minds is where does one put “fresh capital” to work today? We want to highlight three reasons why the case for buying Industrials has strengthened recently:

• First, Industrials have moved up decisively in our sector rankings (see below) and in overall attractiveness, is really only second to FAANG (FAANG is in the top 3 sectors). This is a notable change and reflects the combination of improving fundamentals, technicals and momentum. In fact, Industrials XLI -2.19%  is now above both the 20dma and 200dma, a sign of gaining strength.
• Second, with 1Q2023 EPS season over, 60.5% of Industrials reported positive 1Q23 EPS growth YoY%, a figure second only to Energy (60.9%). Think about this, the fundamentals of Industrials improved such that the majority are reporting higher YoY% EPS growth. The weaker USD helps by the way.
• Third, Industrials look to have confirmed a DeMark Sequential ’13’ Buy Signal. As indicated on the chart below, Industrials generated a ’13’ TD sequential Buy on 5/25. And as DeMark analytics notes, this has to be confirmed by a positive price move within 4 trading days. On June 1 (Thursday last week), we got the positive price signal. And on Friday, XLI -2.19%  moved above 20dma, so further confirmation.
• Fourth, last week, we got the May ISM manufacturing PMI and it came in at 46.9, and now the second month above the March low of 46.3. Thus, confirming the low. Since 1948, this is a buy signal for Industrials:
  – median 6M/12M returns are 12.6%/21.5%, respectively
  – win ratio 6M/12M are 85%/95%, respectively
  – These are forward returns higher than what is expected for the broader market.

INDUSTRIALS: 17 strongest Industrials using Granny Shots methodology

We have listed 17 of the strongest Industrial stocks in the S&P 500. These are using the same criteria we use to identify our “Super Grannies.” That is, a combination of strong fundamentals (DQM), momentum (IBD) and technicals (P/20D, P/200D). These 17 stocks are (in order of ranking, highest to lowest):

• Ingersoll Rand Inc (IR -3.55% )
• Boeing Co/The (BA -2.06% )
• PACCAR Inc (PCAR -1.88% )
• Copart Inc (CPRT -2.80% )
• General Electric Co (GE -4.43% )
• CSX Corp (CSX -0.49% )
• Fortive Corp (FTV -2.21% )
• CoStar Group Inc (CSGP -1.97% )
• Broadridge Financial Solutions (BR -0.41% )
• Snap-on Inc (SNA -0.77% )
• Fastenal Co (FAST -0.48% )
• Rockwell Automation Inc (ROK -2.63% )
• Illinois Tool Works Inc (ITW -0.47% )
• Howmet Aerospace Inc (HWM -6.22% )
• WW Grainger Inc (GWW -1.60% )
• A O Smith Corp (AOS -1.21% )
• Old Dominion Freight Line Inc (ODFL -8.57% )

INDUSTRIALS: Best group after FAANG cousins

As shown below, Industrials are the next most attractive after FAANG cousins.

And as this table below highlights, underlying fundamentals have been solid. Especially when compared to S&P 500 overall.

• EPS 1Q23 Positive YoY% 60.5% vs 53.2% for S&P 500
• EPS 2023 positive revisions at 65.8% vs 56.2%
• seems like stronger vs market overall… right?

Industrials look to have confirmed a DeMark Sequential ’13’ Buy Signal.

• As indicated on the chart below, Industrials generated a ’13’ TD sequential Buy on 5/25.
• And as DeMark analytics notes, this has to be confirmed by a positive price move within 4 trading days.
• On June 1 (Thursday last week), we got the positive price signal.
• And on Friday, XLI -2.19%  moved above 20dma, so further confirmation.

Last week, we got the May ISM manufacturing PMI and it came in at 46.9, and now the second month above the March low of 46.3. Thus, confirming the low. Since 1948, this is a buy signal for Industrials:

• median 6M/12M returns are 12.6%/21.5%, respectively
• win ratio 6M/12M are 85%/95%, respectively
• These are forward returns higher than what is expected for the broader market.

We have listed 17 of the strongest Industrial stocks in the S&P 500. These are using the same criteria we use to identify our “Super Grannies.” That is, a combination of strong fundamentals (DQM), momentum (IBD) and technicals (P/20D, P/200D).

• These 17 stocks are (in order of ranking, highest to lowest)

ECONOMIC CALENDAR: FOMC key in June

Key incoming data June

• 6/1 10am ET May ISM Manufacturing Tame
• 6/2 8:30am ET May Jobs report Tame
• 6/5 10am ET May ISM Services
• 6/7 Manheim Used Vehicle Value Index May
• 6/9 Atlanta Fed Wage Tracker April
• 6/13 8:30am ET May CPI
• 6/14 8:30am ET May PPI
• 6/14 2pm ET April FOMC rates decision
• 6/16 10am ET U. Mich. May prelim 1-yr inflation
• 6/27 Conference Board Consumer Confidence
• 6/30 8:30am ET May PCE

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up) Positive inflection
• 5/2 10am ET Mar JOLTS Softer than consensus
• 5/3 10am ET April ISM Services Tame
• 5/3 2pm Fed May FOMC rates decision Dovish
• 5/5 8:30am ET April Jobs report Tame
• 5/5 Manheim Used Vehicle Value Index April Tame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion Survey Better than feared
• 5/10 8:30am ET April CPI Tame
• 5/11 8:30am ET April PPI Tame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutes Dovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

SHORT POSITIONING: Rose +7.4% last week…wow

On this last point, contrary to the “Bear”-istas, market breadth surely seems to be expanding solidly at the moment. This is a positive set up in our view. For the first 5 months of 2023, FAANG was doing the heavy lifting for the market. Now it looks like the rest of the S&P 500 is now responding to falling inflationary pressures, possible easing FCI and overall improving market dynamics.

• One would think this has convinced institutional investors to become more constructive. The latest CFTC futures positioning shows institutional investors increased their short positioning by +7.4% last week (5/30).
• Yup. In the face of a market rally, an additional 30,000 S&P 500 futures contracts were shorted and now represents 17.4% of all open interest. This is essentially the largest short position ever. Does this mean stocks could see a further meltup? Maybe.

_____________________________

34 Granny Shot Ideas: We performed our quarterly rebalance on 4/26. Full stock list here –> Click here

______________________________

We publish on a 3-day a week schedule:

Monday
SKIP TUESDAY
Wednesday
SKIP THURSDAY
Friday