The long-term market cycle remains bullish and I continue to expect the Standard & Poor’s 500 Index (SPX) to move higher through year-end, punctuated with tactical, multi-month pullbacks. These should be viewed as buying opportunities.
With weekly price momentum and sentiment indicators now in overbought territory, I have fielded a lot of client questions asking how to manage equity exposure at current levels. Both Tom Lee and I suggest investors remain focused on the long-term bullish outlook through 2020 but also to be prepared for temporary choppiness in and possibly through 2Q.
Traders should consider the SPX 15-day simple moving average (sma), currently at 3287, as a reasonable proxy to use as a trailing short-term stop. Sector rotation is likely to intensify late in 1Q and through 2Q. Under the hood of the SPX, sector leadership continues to show evidence of rotating yet again. Outside of technology’s ongoing leadership, cyclicals continue to pause and pullback after their impressive surge through 4Q into 1Q.
In contrast, more defensive, lower volatility sectors, such as utilities, staples, REITs and select healthcare are beginning to rebound after pulling back through most of 4Q.
Netflix (NFLX) is another large-cap growth stock poised to emerge from an 18-month trading range. After a 40% rally off the September lows, many of you will understandably question whether it is too late to be buying NFLX now. I counter that by stating NFLX is following a similar trajectory of many of the large-cap accelerating growth stocks featured here over the past 4-6 weeks such as Ali Baba (BABA) and Amazon (AMZN).
First, the long-term price profile of NFLX is that of a strongly trending growth stock that has simply consolidated for 18-months catching up to its longer-term trend represented by the rising 200-week sma. Secondly, after rebounding with the broader market in 4Q, NFLX has just recently climbed above an important resistance level near $322, its 200-dma. It then pulled back to retest that support level only to reaccelerate from that level.
How high could NFLX rally? One widely followed technical method of projecting potential price moves is to double the recent trading range. Depending on the reference points used, that would be $420 to $600. Instead, I’d encourage investors to view the longer-term chart of NFLX as a bullish consolidation in a longer-term uptrend.
