ADI: An Emerging Cyclical Tech Name to Buy on Pullbacks
Bull market behavior – At the risk of stating the obvious, the surge in equities has been nothing short of impressive. The number of stocks participating on the upside continues to expand as more economy sensitive stocks either break out above their June-October trading ranges, or in the case of financials and energy, reverse 2-4 month downtrends. And, while cyclical stock accelerate, growth stocks continue to consolidate in orderly, sideways trading ranges toward longer-term support at their rising 200-day moving averages, working off the overbought condition that developed in the summer. From my technical perspective, the overall behavior reflects a market in the relatively early stages of a normal bull cycle with capital flowing into more pro growth groups from safety asset classes like treasury bonds and safety sectors, such as staples.
Too far too fast? – Of course, with cyclical stocks rallying so strongly over the past 3 months, a growing number of managers are questioning whether the rally has gone too far too fast. After all, the Russell 2000 Small-cap Index, a barometer for cyclical stocks, is up over 30% from late September and just over 20% from the end of October!
For short-term traders, yellow flags are beginning to show up and signal caution as put-call ratios have dropped to low levels and sentiment indicators have risen to relatively high bullish readings. In addition, after the surge over the past 4-6 weeks, I’m finding it increasingly difficult to find new ‘timely’ trading ideas. So what to do? With trading indicators at short-term overbought levels, a pullback should not be a surprise but I continue to expect dips to be short lived. For traders, I find trailing stops near the 15-day moving average to be one useful way to stay with this type of strong trend while keeping drawdowns relatively small. However, the more important message continues to be that the bull cycle is not showing any meaningful evidence of peaking yet. I expect further upside through 2021 and expect a tactical, multi-month pause/peak to develop by mid Q1. By that time, the weekly indicators I follow, tracking 1-2 quarter shifts, are become likely to be overbought and support a pause in the uptrend.
Trading indicators are becoming overbought. Expect pullbacks to be short lived.
ADI – A cyclical technology idea to accumulate on near-term pullbacks.
The current cycle looks similar to the post 2012 and 2016 bull cycle for ADI.
What to buy on near-term pullbacks?Analog Devices (ADI) continues to hit my technical screens as name to own for the cycle. Why? ADI is a secular uptrend but also has the benefit of being a cyclical stock that will benefit from an improving economic backdrop. In the very short-term ADI does look extended, but similar to the post 2012 and 2016 breakouts, pullbacks are shallow and ADI continued to trend to the upside. Use pending short-term pullbacks to build exposure.
Figure: Weekly Sector Review
Source: Fundstrat, FactSet
- Industrials and materials continue to trend above their 50-day relative performance moving averages.
- Financials and energy were noteworthy as they finally broke above their declining 50-day moving averages of relative performance vs the S&P 500.
- The discretionary sector remains in a relative performance correction within a longer-term uptrend while technology remains range bound
- Safety sectors, such as utilities, staples and healthcare, remain in weak relative performance trends as cyclicals rebound.
Figure: Best and worst performance sectors over past 3 months
More from the author
Articles Read 1/2
🎁 Unlock 1 extra article by joining our Community!
Stay up to date with the latest articles. You’ll even get special recommendations weekly.
Already have an account? Sign In e31b45-2f1de4-aa0557-38008f-a8cfea
Already have an account? Sign In e31b45-2f1de4-aa0557-38008f-a8cfea
