Near-term choppiness but the long-term cycle backdrop remains bullish – I continue to expect equity markets to remain in a choppy range near-term but would encourage readers to not lose sight of the bullish long-term cycle backdrop. Our market indicators, tracking 2-4 year moves, continue to build to the upside from deeply oversold levels and are unlikely to show evidence of peaking until well into 2021 and likely not until 2022. For reference, the average 4-year cycle return, during secular bull markets, is 100-110%. Obviously, there is no guarantee this will develop, but if history is any guide, then a rally to S&P 4400-4600 (+25-30%) is not unreasonable before a cycle peak develops. In addition, the relative performance of the S&P 500 versus one of the most widely tracked bond indices, the Barclay’s Aggregate Bond Index, recently broke above its 2018-2020 trading range. I view this event as a long-term bullish technical signal that is likely to impact passive and active fund flows well into 2021. Trend following CTA accounts are just one example of the type of funds that will allocate more capital to equities away at the expense of funds.
Bullish: Advance-decline lines for the S&P and NYSE are making new cycle highs. While I expect equity markets to remain choppy in the near-term, I would stress it is unlikely to disrupt the ongoing uptrend for equities. Here again I would encourage readers to stay focused on improving market internals. For example, the advance-decline lines for the NYSE and S&P 500 made new all-time cycle highs in the past week indicating more stocks are moving higher not lower. As a general rule of thumb, new A-D line highs is bullish for stocks and suggests new highs are pending for those indices.
What to do? AME, ROK and ADSK – 3 Automation ideas emerging from their summer trading ranges.
With participation expanding, I continue to encourage investors to broaden exposure within portfolios to more cyclical stocks to complement core positions in growth stocks. AME, ROK and ADSK, are noteworthy timely long ideas within Tom Lee’s list of recommended AI/Automation ideas. These stocks look like the ideal mix of both growth stocks in uptrends but have plenty of exposure to an improving economy in 2021. Similar to most cyclicals, all three stocks paused in June and have traded in broad trading range since. Since September 22-24 however, they are all showing signs of accelerating to the upside and are beginning to break-out to new cycle highs. I recommend using near-term weakness to add to these stocks to broaden portfolio exposure to more cyclical ideas.
Figure: Weekly Sector Review
Source: FSInsight, FactSet
- Discretionary and technology uptrends intact with industrials and materials again strengthening above 50-dma moving averages of their relative performance trends.
- Energy and Financials are showing early evidence of bottoming intermediate-term but have yet to show any meaningful improvement in their relative performance trends.
Figure: Best and worst performance sectors over past 3 months