Cyclical stocks continue to show more evidence of bottoming. Last week, I noted after a correcting from the highs on June 8, cyclicals in general, were poised to rally.
Over the past week, cyclicals have begun to rebound, and now look poised to rise further into late July. By then, my expectation is that the daily momentum indicators I’ve been watching over the past few weeks are likely to move back toward overbought territory, setting the stage for another pullback/pause well into August.
I appreciate most readers are unlikely to be so short-term focused, but for those investing in the longer-term improvement in cyclicals that my colleagues Tom Lee and Brian Rauscher and I see developing, it’s important to be prepared for these quick tactical swings I expect will continue through 2H20.
Meanwhile, in contrast to cyclicals, growth stocks have had impressive surges since June 8. As a poster child for momentum stocks, Tesla ( TSLA) was up over 90% over the past two weeks and over 400% since the March lows. Impressive to say the least.
The Nasdaq, along with many Software and Cloud/SAAS stocks looked to have hit a short-term reversal last Monday and are likely in pause/corrective window as cyclical stocks rebound. Regardless, many of the institutional growth managers I speak with have zero to no interest in buying cyclicals. That’s not surprising given most cyclicals simply don’t meet the accelerating earnings growth metric they look for.
What is timely for a growth manager to buy? This week’s chart is Intuitive Surgical (ISRG) which is in the early stages of accelerating to the upside.
ISRG has traded in a broad 40%+ trading range for the past two years but is now beginning to break-out to the upside. Sure, ISRG is up 10% in the past few days but I view this recent acceleration as being the early stages of a new upside trend and not the late stages of an advanced move. A simple technical measuring technique to forecast potential upside for stocks breaking out of a trading range is to double the trading range. For ISRG, doubling its recent trading range suggests it could rally to 888. I would also highlight that ISRG’s relative performance is in the early stages of reversing a 2-year downtrend.
Bottom Line: I recommend accumulating ISRG at current levels and on near-term pullbacks in anticipation of an emerging new uptrend developing.
Figure: Weekly Sector Review
Source: Fundstrat, FactSet
Figure: Best and worst performance sectors over past 3 months
