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.

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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

The equity market rally that began in June is still moving higher and has been described by some as “the most hated rally ever”.  Some forecasters, including my colleagues, have turned more constructive for a variety of reasons.  However, most non-technical bullish forecasts are based on the inflation story beginning to fade, a resilient U.S. economy that will not fall into a deep recession, and the ongoing negative earnings revisions cycle does not matter because the Fed is likely to be easing sooner rather than later.  Importantly, my work and view of the macro does not support these assumptions or the outcome.  Thus, I remain the house bear.    

With that being said, my aggressive tactical indicators that I have written about in prior publications (HALO-2 & V-Squared) continue to be favorable as I stated in last month’s update, which suggests that the ongoing bounce may still be able to frustrate the doubters a bit longer.  Yet, at this stage, I would have a hard time suggesting to even the most aggressive trader that there is enough upside left to chase from the S&P 500’s current level near 4300.  So, the rally seems too long in the tooth, and it seems quite likely that a consolidation/pullback could occur at any time, and investors need to be careful.  

Once again, I would like to remind readers that bear market rallies are not uncommon and bounces in down markets historically have quite frequently reached 10-20%, and the S&P 500 still fell to retest the old lows or fall even further.  For example, 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% with the largest being 24%.  I was taught by my mentors that the purpose of the bear market rally was to reignite bullishness, raise optimism, and to crush the shorts and bears.  As I talk to many institutional investors every day, I can surely pass along that the ongoing upward move in equities has certainly been causing pain to investors that remain skeptical of the bounce.  Once this mission is accomplished, the market gods now look to punish the reenergized bulls and equity prices resume their move down. 

The macro backdrop is one of the most challenging that I can remember in all my years on the Street.  Not only is the geopolitical backdrop creating unique issues and pushing up energy prices, but also, we have elevated inflation for the first time in decades, weak global growth as China and Europe are struggling, central banks around the world that are mainly becoming more restrictive, as well as the Fed’s quantitative tightening that will double to roughly $90billion a month, which is unprecedented.  Any one of these would make the equity environment tricky, but all of them at the same time raises the complexity to a high level for all, including the best of best professional investment managers.  

From my perspective, I agree with many forecasters that the rate of change of inflation has likely peaked and is beginning to decelerate, but my work and my brain are having a hard time getting comfortable and justifying that the Fed will be easing soon with yr/yr CPI still running above 8%.  Maybe inflation will crater quite quickly, but my models find this unlikely without the labor market falling apart and the domestic economy declining into an imminent recession, which at the moment, do not look like high probability outcomes.  In my view, this is important because if Chair Powell and crew will not be shifting back to accommodative the cutting of forward profit expectations matters and is not priced into markets based on my research.  If the “Dovish Pivot” is the ultimate path for the FOMC, then all my worries and discussions about negative earnings revisions probably are less relevant as investors would likely look through the profit shortfall because the central bank will once again come to the rescue.  We are approaching the much anticipated appearance and comments of Chair Powell at the Jackson Hole Symposium next week, where we might get some additional insights to the path of monetary policy for the next couple of quarters.  

Here is an update in case earnings do matter: the ASM indicator for the S&P 500 is still declining. In addition, leading indicators strongly suggest it will keep weakening. So, my expectations have been playing out and time is likely still needed before an important bullish signal is flashed.

I get asked quite a bit in my regular client meetings what scares me the most about remaining bearish on the equity market.  For me, it is quite easy — the positioning data still suggests that there is a lot of bearishness by professional investors, that mechanical accounts appear to have more buying to do, and nearly every one of what I will describe as “smart accounts” remain disbelievers of this ongoing rally.  Being a contrarian at heart, this does keep me agitated, on my toes, and diving deep into my key indicators to see if I need to make any changes to my views. 

I remind readers that, 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.  The performance of my picks is lagging the S&P 500 and that is both frustrating and needs to be improved as we move forward.  However, I will say that staying close to benchmark will put us in good shape to surge ahead once my models signal calmer seas ahead. I am confident that goal will be reached over time, and I do want to reiterate that my model historically performs well on a 6-, 12-, and 18-month time horizons so let’s stick with the process and we will likely be rewarded for our discipline. 

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 is that my key indicators are still not supporting this bounce, which suggests that there remains considerable downside risk for investors.  The next dip will be important as valuable information will likely become apparent if it is an opportunity to buy or a resumption of the bear market.  Thus, I continue to advise patience and to use the rally as an opportunity to raise cash, reposition, or increase hedges.  Furthermore, I reiterate that investors should keep your eyes and focus on the end game as the multi-month outlook is remains tenuous at best, and that my key indicators are still pointing to a better, high quality, buying opportunity that is still in front of us.

Changes this month

Summary

Analysis

Dunks

AMZN 1.73%  – Amazon ( PLAY )

ASM Indicator: It is rising off its extreme negative low, which has and continues to be one of my biggest factors for including AMZN in my dunks list because historically the stock performs quite well when its ASM is favorable. As I have stated during the last couple of updates, the red bars for the company have not yet begun to shrink. I continue to expect this to occur and once it does the stock will have another important tailwind for price gains.

Brian’s Take: After a brutal underperformance period versus the S&P that began in July 2020, AMZN has bounced roughly 40% since its June price low as its ASM indicators has been improving. Tactically, the stock is approaching overhead technical resistance and is overbought. Thus, it would not be a surprise to see AMZN consolidate its recent gains below $150-140, but any weakness should be viewed as an opportunity to buy the dip as the outlook for the next 12-18 months looks promising.

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: I have commented that its key metric was showing some early signs of possibly tiring, but over the last month has regained strength. Thus, my concerns are currently off the board for now, especially with its green bars remain healthy and supportive.

Brian’s Take: The entire Energy sector has struggled since it made its relative high in June when it was severely overbought. With that condition relieved and the sector’s ASM still favorable, it appears that there should be attempt for another outperformance run and FANG looks quite favorable on all its key metrics.

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: It has had a bit of an unexpected tumble, but its red bars remain small and still getting less bad. Thus, I am willing to give RTX the benefit of the doubt and will keep a close eye on the company over the next month to see if it can regain it favorable trend.

Brian’s Take: The stock got extremely overbought relative to the S&P 500 at the beginning of July and has been consolidating. It now appears ready to resume its market-beating performance and is presenting an attractive opportunity for investors to raise exposure.

Commentary: Raytheon operates as an aircraft manufacturing company as well as 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: Its key indicator remains in an upward trend as it is stair stepping higher and still not at positive extreme levels, which suggests that the level of optimism has not yet reached its peak. Additionally, its green bars remain supportive and are confirming the favorable ASM reading. Hence, my 12-18 month view is still in place.

Brian’s Take: Since its recent tactical bottom in June, CCJ has been working its way higher despite the overall Energy sector being the weakest area. The stock appears a bit tactically overbought and may experience some consolidation that may see the CCJ trade down to $21-20, but I would view this as an opportunity to buy the weakness as the secular story for this uranium company that is critical for the nuclear industry remains in place. The ongoing shift away from carbon based energy sources to generate electricity continues to grow and nuclear appears to be a critical contributor as Germany’s recent shift to keep their reactors online.

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: This historical defensive growth company continues to see its key metric work higher, which is still providing a favorable tailwind for CPB. Also, its shift to green bars that I pointed out in last month’s update remains in place, which should help drive additional performance gains for the stock.

Brian’s Take: The stock has been a steady performer since it was put on the dunk list and despite marginally underperforming the S&P 500 I am happy with its entry. As I continue to be skeptical about the ongoing market rally’s sustainability, once it finally ends and the dominant story shifts towards economic growth fears and estimate cuts for cyclicals, CPB will likely be a significant outperformer. Significantly, do not forget the over 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

TPX – Tempur Sealy International ( PLAY )

ASM Indicator: The ASM indicator has been under intense downward pressure since reaching an excessive positive peak and rolling over during January. While this was occurring, TPX had its bars go from max green to sizable red, which was a dramatic reversal. Importantly, however, its key metrics are now at extreme negative levels that have historically led to attractive entry points for a name.

Brian’s Take: Since peaking in late September 2021, TPX fell over 50% as its key metrics rolled over, but the stock has begun to act better over the last couple of months. Although the operating environment for the company remains challenged and the stock is tactically overbought, there is a lot of bad news priced into TPX and the next 6-12 months have a high probability of being “less bad” and evolving into absolute favorable. So, I recommend using expected tactical weakness in the stock as an opportunity to slowly begin putting some new money to work.

Commentary: Tempur Sealy International is a leading designer, manufacturer, distributor, and retailer of bedding products comprised of both traditional innerspring mattresses and non-innerspring mattresses. Its Tempur, Tempur-Pedic, Sealy, and Stearns & Foster brands are sold in 100-plus countries through retailers such as furniture and department stores, online, wholesale clubs, and through third-party distributors. The US accounts for about 75% of Tempur Sealy’s revenue.

PM -0.26%  – Phillip Morris ( PLAY )

ASM Indicator: PM’s key metric is clearly rising after reaching extreme negative readings in 1Q22. Its red bars are also shrinking and supporting the favorable ASM reading. I continue to view this combination as attractive as it has a high historical probability of providing investors with market beating returns over the subsequent 12-18 months.

Brian’s Take: The stock is providing a valuable countercyclical exposure to Midrange Jumpers, which has a lot of growthier type of names. As stated in previous updates, PM’s 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: The expected improvement in its key indicator has been playing out much slower than I expected, but it is making marginal favorable progress. While ISRG’s ASM is incrementally rising, its red bars are still in a less bad trend that is supporting my view to stick with ISRG.

Brian’s Take: By far, ISRG has been my biggest frustration since the Dunk’s list was launched as the company’s key metrics and price performance reversal continue to struggle. With that being said, the indicator backdrop remains quite attractive for the next 12-18 months and I am willing to view the cutting edge HC name as a great opportunity to buy this name on sale.

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 )

ASM Indicator: Its key indicator continues to rise after making a shallow higher low, 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 continues to look quite attractive for the next 12-18 months.

Brian’s Take: The stock has posted nice gains since it was added during my last update and its indicator backdrop continues to be healthy, which suggests this name is still in the early phase of an outperformance run that has a lot of potential for the next 12-18 months. I reiterate my view tactical weakness should be viewed opportunistically 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: Its key indicator continues to power higher and has flipped its bars from red to green, which is a strong confirmation signal and historically bodes well for additional performance gains. Therefore, I continue to view AMT as an attractive opportunity and evaluating if it should be bumped up from the Midrange Jumpers to the Dunk’s List.

Brian’s Take: After being a solid outperformer, AMT has been consolidating relative to the S&P 500 over the last two months. Importantly, as its key metrics have been gaining strength, it now appears that the stock is poised to resume its relative uptrend and reward investors nicely over the next 6-12 months.

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 LYV completely from the Midrange Jumpers 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 started acting a bit better, and if you still own them I would recommend holding them.

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.