Key Takeaways
- Thursday-Friday decline has stripped away benefits of Tuesday-Wednesday’s bounce. Near-term US equity trend remains negative, but downside risk/reward looks poor, and markets likely bottom out sometime next week
- Tobacco’s strength has helped this sub-sector outperform all other S&P GICS Level 3 groups this past week, higher by more than 5%. MO, PM analyzed in this report
This week’s selloff looks to be growing ever closer to tradable lows for S&P, despite what appears to be ongoing weakness in prices and momentum. While prices closed down near lows of the week, breadth levels are actually higher in the very short-run than what was seen back in late January, despite SPX nearly having reached January’s low close. Elliott patterns, per my own interpretation, should be in the process of bottoming out near 4250 in SPX, or merely 2% below before turning back higher for a rally into March. Overall, the risk/reward for shorts looks to be sub-par and it should be right to favor the Growth trade snapping back vs. Value. Interestingly enough, we’ve experienced a difficult first seven weeks for both stocks and bonds as both have fallen more than 5%, which has only happened a handful of occasions in the last 40 years.
Tobacco “On Fire” this past week- Many within this group look like attractive areas to position for 1H 2022. Developments over the last 48-72 trading hours
This subsector of Food, Beverage and Tobacco managed to turn the best performance of any of the SPX GICS Level 3 groups this past week, higher by more than 5% at a time of continued decline in many other parts of the US Equity markets.
Owning “safe” stocks like Tobacco and Food stocks looks like a smart move as a way to diversify and position with less volatility during a time of upheaval in stock indices where Technology can’t seem to find its footing.
Overall, while Technology and growth should begin to stabilize within 1-2 weeks and bounce back, owning strong groups like Tobacco within Staples where many stocks are hitting new 52-week highs looks appealing in the first half of 2022 when stock indices might continue to show volatility.
Weekly charts of the sub-group, per Marketsmith, show prices having closed at the highest levels since last Fall. If it weren’t for the poor performance of a few holdings like BTI, or VGR, these Tobacco weekly charts would likely be in even better shape. Bottom line, further strength is likely in this group on an intermediate-term basis. Any lagging or pullback seen in the weeks to come should represent a chance to buy dips for rallies that likely help this industry group push up to challenge 2018 highs. As the saying goes, “ Smoke ‘Em, if you got ‘Em”
Philip Morris International (PM 3.67% ) stands out as the strongest within this group but has become stretched in recent weeks after a 30% advance just since mid-November when many of the broader US stock indices and sectors peaked out (NASDAQ Composite, DJ Transportation Avg, Russell 2000, Value Line Geometric Avg). Technicals remain strong, and longs are preferred, looking to buy dips for a push up to $123 to test Summer 2017 highs.
Altria Group (MO 2.42% ) looks to be more actionable from a Risk-reward perspective, as this has just emerged from a recent consolidation base after its breakout of the longer-term downtrend. Its 2/18 close just exceeded peaks from last month along with May and September of 2021. While stocks like PM have gotten overbought, MO is not nearly as overdone, but just starting to show technical evidence of turning higher. Upside looks likely to targets at $60.
