More evidence of cyclicals bottoming intermediate-term – Weekly momentum indicators are a useful technical tool to identify potential turning points in markets and stocks over a 1-2 quarter time frame. In general, I see the equity market shifting from offense, or risk on, to defense, or risk off, one to two times per year. Last week, I discussed our proprietary weekly momentary indicator, that tracks the percentage of stocks with rising weekly momentum for S&P 500 stocks, as beginning to bottom. Since June and through the summer, many stocks, notably cyclicals, stalled and either traded sideways or have been in corrections.
However, over the past two weeks, we see incremental evidence that more cyclicals are bottoming. Interestingly, two of the weakest sectors through the summer, energy and notably financials, stood out the past week as they began to finally show evidence of bottoming. I am not convinced yet these sectors are about to assume the leadership in the market, but I am encouraged that the weaker areas of the market are starting to show signs of bottoming. The bottom line here is that after a volatile summer, a growing list of stocks, notably cyclicals, including financials and energy, are finally showing evidence of bottoming which should help propel the market higher into year-end and well into Q1 2021.
What to do? I continue to recommend a portfolio that holds both secular growth stocks and cyclical growth stocks and to underweight more defensive sector such as staples and utilities. My expectation for a pullback this week has been incorrect outside of last Friday’s sell-off in response to the President’s tweet regarding stimulus negotiations. I continue to expect some volatility to pick up heading into the middle to latter part of October and would use weakness to continue buying equities, particularly those with that are showing evidence of emerging as illustrated in today’s buy ideas below.
EBAY and AOS are very different businesses but they are a good example of a timely growth stock (EBAY) and a timely cyclical (AOS) with similar technical characteristics. EBAY broke out a 2-year trading range in Q2, and after pulling back to support in Q3, appears to be in the early stages of starting a new upleg within its longer-term bull market. By contrast, while EBAY consolidated through 2018 and 2019, AOS was in a bear market over the same period. However, while EBAY broke out of its 2-year trading range in Q2 2020, AOS reversed its 2-year bear market. After a multi-month pause in Q3, AOS is breaking out to the upside in what appears to be its next bull market upleg.
Bottom line: Accumulate both EBAY and AOS at current levels and on near-term pullbacks as part of portfolio with exposure to both growth and cyclical stocks.
Figure: Weekly Sector Review
Source: FSInsight, FactSet
- Discretionary and technology bounce back with discretionary notching new all-time relative performance highs.
- Industrials and materials are again improving with financials, and secondarily energy, showing early evidence of bottoming intermediate term
Figure: Best and worst performance sectors over past 3 months
