Our research, which has been developed over two decades of Wall Street experience, strongly suggests that our Dunks Product can add significant value by supplementing the actively managed part of your portfolio. By highlighting individual stocks with high-quality reward risk ratios that over the medium/long-term it is possible to raise the probability of outperforming the overall equity market without taking on excessive amounts of risk.

For those who are less risk-averse, we also present some higher-risk, but often higher-reward opportunities that will be included in the Mid-Range Jumper section of the overall Dunks. Both these stock lists are derived by the models and techniques that we have been producing for professional institutional investors since the 1990s. For the first time ever, I am now making it available to retail investors on FSInsight.com.

Our investment and selection methodologies are grounded in proprietary quantitative analysis and methods that have not only stood the test of time but also have been evolving. Please be aware that, because we are using a quantitative model-based method, we are not doing extensive fundamental and catalyst analysis on the individual names we land on. You should always do additional due diligence before adding a name to your portfolio to ensure it conforms with your individual risk tolerance and investment goals.

Click HERE to read the intro of Brian’s Dunks

Please note that Brian recently did a Live Webinar where he walked through his sector recommendations and the most popular single stock from our FSI Members and Community. Click here to watch the replay.

Also, Brian has created a short methodology video explaining his sector selection methodology. Click here to watch it!

Market Commentary

In my macro comments from last month’s Dunk’s update, I posed the question if THE bottom on S&P 500 had been reached. My answer was that I had zero evidence of that, but a tactical bottom was possible as one of my aggressive tactical indicators was at a negative extreme, which is a contrarian favorable signal. Well, the index has not made a lower low since June’s trough and has shifted from a sideways pattern to clearly drifting up this week. Considering this upward move by the S&P 500 has now reached nearly 4000, the question coming from clients the most is:

Do I have any change of view regarding my concerns of downside risk and next target range of 3600-3500?

The simple answer is NO.

Yes, my aggressive tactical indicators that I have written about in prior publications (HALO-2 & V-Squared) have flipped to favorable, which suggests that the ongoing bounce may still be able to drift even higher before the equity index reaches its final peak of this countertrend rally. With that being said, let me remind readers about failing equity bounces within an ongoing bear market that I included in my 6/24 Whispers report. During the Tech Wreck, the S&P 500 had seven rallies greater than 7%, which included three that were over 19%. When looking at the Financial Crisis, there were five rallies greater than 7% and three that were more than 12%. The largest rally was 24%.

What was common in both the bear market periods that contributed to the ongoing downward tug and then flashed a reversal signal that preceded THE final bottom? 

My proprietary earnings revisions indicator for the S&P 500, which I call Analyst Sentiment Measure (ASM).  In those large and painful drawdown periods for equities, there were tactical oversold conditions that were catalysts for countertrend bounces even though the ASM indicator was still declining.  Importantly, however, once those bear market rallies had relieved their oversold conditions and exhausted themselves, the continuing weakness in its ASM pulled the S&P lower and lower until my key indicator reached its max negative reading and showed signs of trying to inflect. 

Ok Brian, what is your latest ASM indicator reading for the S&P 500 and are there any signs of bottoming yet?

As I have been writing about quite a bit in my weekly Whispers notes, the ASM indicator for the index is still declining. In addition, leading indicators strongly suggest it will keep weakening and that in a month or two it will reach the top end of my downside ASM target range of minus 20 to minus 40, where I will become uber alert for a potential reversal. So, my expectations have been playing out and time is likely still needed before an important bullish signal is flashed.

But, the equity market is acting well and there is a lot of negativity out there.  Isn’t there a lot of negativity out there already and doesn’t everyone already think that forecasts have to move lower?  So, are your concerns already priced in by markets? 

Well, I am getting pushback this week both internally and externally. And to be fair, the questions above are legitimate and reasonable. My answers are as follows:

Yes, there is a lot of negativity. Yes, I would concede that the consensus has moved to my early call for estimates to fall. NO, my work would suggest that my concerns and my expectation for the ASM indicator to keep falling are NOT yet already fully priced into equity market pricing. Perceptions/forecasts likely have to fall well below reality and once that happens the timer for THE market bottom will start counting down.

As a reminder, the S&P 500 has always been off its peak by 7-26% BEFORE its ASM indicator fell below zero and still fell an average of 18%, and median 10%, while it was on the way to making a final extreme negative low. This has happened in all five previous occurrences since 1990.

In addition, my other key indicators are not showing any signs of getting less bad, as well as the macro backdrop remaining as challenging as any that I have seen in my 20+ years of being on Wall Street. The challenges that will be impacting global growth from the continuation of the zero COVID policies in China that keeps their economy partially locked down, to the ongoing natural gas/electricity problems for Germany and other key areas within Europe that will cause ongoing formidable headwinds to the region’s growth, to central banks around the world that continue to drain monetary accommodation in their battles against inflation, to elevated energy and food prices that are impacting consumers, to large and likely disruptive currency moves as the USD continues to surge while many other global currencies have considerably weakened, and the ongoing geopolitical environment.

As stated last month, the current environment remains quite difficult regardless of one’s knowledge and experience, and that also goes for institutional clients that I speak with every day. As a reminder, my Dunks product is designed to outperform the S&P 500 in any environment, but down markets are challenging for any long only positioning to achieve this goal as I don’t want to include too many overly defensive and slower growing names.

I am still not happy with the absolute performance of the Dunks list since it was launched, but I continue to hold the view that based on downward pressure that the overall equity market has been under that we are holding up OK. More work needs to be done here to get us to outperforming, but I am confident that goal will be reached over time. Significantly, I do want to reiterate that my model historically performs very well on a 6-, 12-, and 18-month time horizons, and my research strongly supports that the Dunks will be validated once we move past this period of elevated volatility and macro challenges.

After being involved with the equity markets professionally now for over 25 years, I must pass along that there is sadly no secret technique that will fully ensure that an investor’s long equity money will always post positive returns in shorter-term time periods. We can mitigate drawdowns by raising cash when we are bearish, proper sector allocations, and skillful stock selection, but even if executed to perfection it is hard to avoid down markets. With all that being said, my experience on the Street has helped me get my battle scars while evolving and enhancing my investment process.

We will get an opportunity to pivot back to bullishness, but for now investors need to be vigilant and disciplined. My work shows that slow, steady, and keeping with a process adds value and outperforms over the longer term. The continuation of the ongoing market volatility and challenging macro backdrop makes it even more important to stick to a systematic methodology.

Bottom line for me is to remain cautious and to advise investors to not get influenced by the siren’s song of the ongoing tactical countertrend rally. Keep your eyes and focus on the end game. The multi-month outlook is still tenuous at best, and my key indicators are still pointing to a better, high quality, sustainable market low, and buying opportunity that still lies on the horizon.

Changes this month

Summary

Analysis

Dunks

AMZN 1.73%  – Amazon ( PLAY )

ASM Indicator: The important metric for AMZN is now rising off of its extreme negative bottom, which has historically been quite bullish for forward performance. Its red bars have not begun to shrink yet, but a solid “less bad” earnings report next week on July 28th would likely be the catalyst for this process to start heading in a healthy direction. Thus, it has taken longer than I have been expecting, but the odds are shifting that our patience will start being rewarded.

Brian’s Take: After a brutal underperformance period versus the S&P that began in July 2020, AMZN is showing nascent signs of putting in both a relative and absolute price bottom, which appears to be supported by a favorable ASM indicator. Hence, I not only recommend keeping AMZN in the Dunks, but for those investors that are not at full exposure the entry point looks attractive for new money as the return profile for the next 12-18months looks quite good.

Commentary: AMZN is the undisputed leader in e-commerce and cloud services through its Amazon Web Services segment. We believe the competitive advantage will be hard for peers to catch up to. The company will likely grow at above-market rates as the importance of cloud and e-commerce continues to increase.

FANG 0.13%  – Diamondback Energy ( PLAY )

ASM Indicator: Its key metric has shown some early signs of possibly tiring, which has my attention. I have been concerned that many names in the Energy sector (GICS L-1) might have reached optimistic extremes for this cycle. I don’t yet have enough evidence to bench FANG, but I am putting the stock on a short leash over the next couple of months.

Brian’s Take: The entire Energy sector and crude oil continue to remain under tactical price pressure, which has surely impacted FANG. Despite the pullback in the stock price, it has not violated its uptrend line and its favorable ASM is hanging on for now. So, I will look for an oversold bounce at some point during the next month and keep monitoring its ASM indicator for FANG’s next important positioning signal.

Commentary: This is a well-managed Energy name that should be able to outperform markets and peers and has a tailwind of being in an attractively valued sector.

RTX -1.77%  – Raytheon ( PLAY )

ASM Indicator: As I have been commenting since February when RTX was added to the Dunk’s List, its key indicator continues to grind higher and is about to move into the northern hemisphere, which will likely catch the attention of more investors. In addition, its red bars are also about to flip to green, which would be another strong piece of evidence that keeps RTX attractive based on my process.

Brian’s Take: The stock has a favorable indicator set up and RTX continues to outperform in a challenging environment. I would look to be a buyer on relative weakness during the month as the 12-18 month outlook is still providing healthy signs.

Commentary: Raytheon operates as an aircraft manufacturing company and is a leading defense contractor. Thus, RTX has a diversified mix of commercial aerospace and military exposure and has been increasing its global exposure as well.

CCJ -3.10%  – Cameco Corporation ( PLAY )

ASM Indicator: The upward trend continues for CCJ and is still not at positive extreme levels, which suggests that the level of optimism has not yet reached its peak. Moreover, its bars continue to stay green and confirm the favorable ASM reading. The longer-term tailwinds remain in place.s to be favorable and grinds higher and CCJ’s bars remain green. The longer-term tailwinds remain in place.

Brian’s Take: After reaching a tactical overbought reading during 2Q22, CCJ’s price performance has struggled to keep moving higher. With that being said, the pause appears to be a healthy and well needed consolidation in an unfinished uptrend that is supported by both its ASM indicator, as well as a strong secular demand environment. If the stock has bouts of tactical price weakness that is tied to pullbacks in energy related areas, my research suggests that the dips should be viewed as an opportunity to put new money to work.

Commentary: The energy transition is happening, but what technology will eventually help bring down carbon solutions without sacrificing quality of the grid? Our research and analysis suggest that nuclear energy will become a more essential part of the world’s solution to evolving clean energy needs.

CPB 2.79%  – Campbell Soup ( PLAY )

ASM Indicator: Its key metric continues to grind higher, which is providing a healthy tailwind for CPB. In addition, it’s nascent shift to small green bars continued over the last month and supports its rising ASM indicator.

Brian’s Take: I added CPB to the Dunk’s List last month as a replacement for BKNG and to reflect my unfavorable overall equity market view. Despite some relative pullback this week, the switch has added alpha as CPB has outperformed. Once the current countertrend S&P 500 bounce finally ends and the dominant story shifts towards growth fears and estimate cuts for cyclicals, CPB will likely be a significant outperformer. Importantly, do not forget the more than 3% dividend yield that also looks quite appealing based on my market outlook. I would be a buyer of relative weakness.

Commentary: The company manufactures and markets food products and has two major segments — Americas Simple Meals & Beverages, which includes its retail/food service business as well as its flagship brands like Campbell’s condensed soups, Swanson stocks and broth, Prego Pasta sauce and V8 juices. The second major segment is Global Biscuits & Snacks, which includes flagship brands like Goldfish crackers and Milano cookies.

Mid-Range Jumpers

LYV 1.26%  – Live Nation ( PLAY )

ASM Indicator: The ASM is still trending higher, and its green bars have stabilized over the last month. Hence, the backdrop for LYV remains favorable and certainly much better than the average cyclical name in the S&P 50.

Brian’s Take: Relative to other areas within the Communication Services sector, LYV’s indicators remain supportive, and the longer-term outlook remains attractive. The stock appears to have made a relative price bottom and I will stay with the name and keep evaluating it while it likely sees some outperformance.

Commentary: This company’s superior scale and operating expertise allow LYV to benefit from the ongoing normalization and return of live events, including concerts.

PM -0.26%  – Phillip Morris ( PLAY )

ASM Indicator: PM’s key metric continues to show signs of rising off its negative extreme ASM reading that occurred late in 1Q22 and supporting this is its red bars are also shrinking. This combination has a high historical probability of providing investors with market beating returns over the subsequent 12-18 months.

Brian’s Take: PM continues to be a nice stabilizer in the Dunk’s list, which has a lot of growthier type of names. Its combination of positive ASM, attractive valuation, and 5% dividend yield continue to flash favorable in my work. Furthermore, its operating results continue to show signs of strength as it has been jumping over its bar set by the Wall Street community. I would look to add on any tactical relative weakness.

Commentary: Phillip-Morris is the third-leading producer of tobacco products. The company has an 11.4% global market share and owns flagship brands such as Marlboro. In addition, PM is also launching an effort into less-harmful, heated tobacco products. This push has been largely unaffected by COVID and is expected to compensate for the declining global sales of cigarettes and tobacco bans.

ISRG 1.70%  – Intuitive Surgical ( PLAY )

ASM Indicator: Its key indicator remains in the southern hemisphere and continues to slowly drift up since the extreme negative ASM trough in January. As a reminder, this signals that estimate cuts are still occurring, but are getting less bad. In addition, the company’s red bars also keep getting smaller, which combined with the favorable ASM reading are historically supportive for any name. Thus, I am sticking with ISRG as its forward outlook is still attractive..

Brian’s Take: ISRG continues to frustrate as it has not been able to stretch its legs and rally as bouts of COVID keep appearing and causing tactical headwinds. The indicator backdrop continues to look attractive and strongly suggests that a lot of bad news is priced into ISRG, which makes this name appealing for the next 12-18months. I will continue to give the company the benefit of the doubt, but I am going to put in on watch as my patience is beginning to be tested.

Commentary: The Health Care sector is experiencing healthy disruptions and changes, and ISRG is one of the leading innovators in the space. The firm has products that utilize both robotics and augmented reality to positively impact the industry and get improved results for patients.

COST 0.88%  – Costco Wholesale ( PLAY )

New Addition

ASM Indicator: The key indicator has finished a shallow down and appears to have held its ASM uptrend, which historically bodes well for the future performance of any name that shows this evidence. Its bars are also poised to start increasing again while its valuation is off its 1Q22 highs. The set up for COST looks quite attractive for the next 12-18months.

Brian’s Take: COST has an attractive indicator backdrop as well as strong price momentum, which looks to be in the early innings for this cycle. I would look to add new money here and view any tactical dips along the way as opportunities to raise exposure.

Commentary: Costco Wholesale Corporation is a membership warehouse club and sells all kinds of food, automotive supplies, toys, hardware, sporting goods, jewelry, electronics, apparel, health, and beauty aids, as well as other goods. COST serves customers worldwide as they have over 800 membership warehouse stores, the company is the nation’s largest wholesale club operator. Primarily under the Costco Wholesale banner, it serves more than 111 million cardholders in some 45 US states, Washington, DC, and Puerto Rico, and about 10 other countries. The company carries an average of approximately 4,000 active stock keeping units (SKUs) per warehouse in its core warehouse business, significantly less than other broadline retailers (many in bulk packaging), ranging from alcoholic beverages and appliances to fresh food, pharmaceuticals, and tires. Certain club memberships also offer products and services, such as car and home insurance, real estate services, and travel packages. Costco generates most of its sales in the US.

AMT 0.25%  – American Tower ( PLAY )

ASM Indicator: The key indicator is still moving higher since it was added to the Midrange Jumpers in late-April and has reached the northern hemisphere, which is a bullish occurrence. Furthermore, the red bars for AMT continue to shrink and fully confirms the supportive ASM reading.

Brian’s Take: The stock has been a nice addition to the list as it has been an outperformer. However, AMT has reached relative overbought on a tactical basis and appears to be consolidating. With a strong ASM indicator and a dividend yield over 2% yield, I would recommend adding new money on any continued relative weakness.

Commentary: American Tower (AMT 0.25% ) is now the largest REIT in the S&P 500 and specializes in leasing multi-tenant properties for wireless providers. It has a real estate portfolio of over 200,000 communications properties. It is heavily exposed to fast growing 5G in domestic and foreign markets. It has steady dividends and has proven itself to be a quality compounder over time with secure revenue and above-average pricing.

Changes

BKNG 3.93% PYPL 4.21%  GM 3.37%  SBUX 3.52%  TSM -0.90%  (HOLD)

I am removing CME completely from the Dunk’s List as its indicator backdrop has weakened and no longer warrants inclusion.

PYPL, GM, SBUX, TSM, and BKNG, which are holdovers in the Hold bucket, will continue to stay there for now.

All names have been struggling and have not acted in line with what my models have been forecasting. While this continues to be quite frustrating and disappointing to me, their set ups are pointing to gains over 6-12 months. However, for discipline, they remain out of the starting rotation.

The “HOLD” bucket is one where a name is not completely kicked out. Longer-term investors with enough funds to keep holding these names and are still able to buy our replacement picks may be well served to do so.