What a business investing is! When markets are down, they get gloomy but when markets rally strongly–as they have over the past few months—they fret that a major correction is pending. My first reaction to this perpetual unease with the equity market rally is that it is consistent with the proverbial wall of worry that underpins most market cycles. And this reinforces my view that stocks should trend higher through 2020 into 2021. Secondly, there actually are technical reasons to be cautious but it is a tactical, not a long-term concern.
Despite the daily headlines noise, the intermediate-term backdrop has not materially changed and remains an important timeframe to filter much of the short-term chatter. Weekly momentum indicators, which track the rate of change of markets over 1-2 quarters time frame, have been turning negative over the past three to five weeks.
I continue to view the sideways, choppy action in more cyclical markets such as EAFE and EM—along with cyclical sectors such as financials, industrials and resources—as a normal healthy pause. While the Standard & Poor’s 500 index and the Nasdaq have made new highs, EAFE, EM, the Russell 2000 have bounced back just below their January highs and remain in normal consolidation patterns, following a surge in 4Q.
The churn into the second quarter should present better buying opportunities in both growth and cyclical stocks.
Given that, regular readers know that I look for stocks that are in the early stages of emerging from multi-month bases similar to those recommend the past few weeks here, like AMZN, BABA, NTES, etc.
In keeping with that theme, this week’s focus chart is Henry Schein (HSIC), a distributor of healthcare products and services. HSIC is attractive technically after having consolidated sideways for the past two years above long-term support defined by its rising 200-week moving average.
While some technical analysts would prefer to wait for a break-out above resistance at the recent high near 73, I’m comfortable if investors accumulate the stock near current levels in anticipation of the break-out. For traders interested in managing downside risk, I recommend using the January lows near 65 as a stop loss level followed by the 200-week sma near 63.50 for those looking for a slightly wider range.
