Upticks - November 2022

Update/Introduction

History shows Sir Isaac Newton not only to have excelled as a mathematician and physicist, but also to be a skilled astronomer, alchemist, theologian, and author.

Many who have studied Newton’s history know that he published a book called “Opticks” back in 1704, expounding his corpuscular theory of light. He considered light to be made up of extremely subtle corpuscles, that ordinary matter was made of grosser corpuscles, and speculated that through a kind of alchemical transmutation. As he puts it, “Are not gross Bodies and Light convertible into one another … and may not Bodies receive much of their Activity from the Particles of Light which enter their Composition?”  

Newton also constructed a primitive form of a frictional electrostatic generator using a glass globe. He was the first to show a diagram using a prism as a beam expander, and also introduced the use of multiple-prism arrays.

Fast forward to October 5, 2022, in homage to the great Isaac Newton, I unveiled my first technical Stock list last month, a subtle play on Newton’s Opticks, called “Upticks.”  This is an intermediate-term technically derived stock list of some of my favorite liquid names within various sectors of the S&P 500, which I feel might offer attractive risk/reward opportunities at this stage of the market.

These ideas are largely based on stocks at/near 52-week highs, which are showing excellent technical structure and little evidence of technical deterioration.   However, in some cases, I will elect to buy stocks which are extreme laggards, if my work shows that they’re primed to begin moving sharply off the lows following initial consolidation.  Note, stocks of this sort are far more likely to be tactical longs than buy-and-hold positions.  However, largely, this list comprises my thinking of the best stocks within most sectors of the S&P 500.

The duration for these selections will largely be 4-6 weeks and hopefully longer.  I have included technical resistance as well as support, which are provided for those who wish to utilize these.  These will be strictly adhered to, and any stock that drops under support on a daily close will be removed from the list, or updated through daily notes to reflect a new level of support . Upside resistance is a guideline only.  In some cases, it might prove to be premature to sell stocks that have reached these levels, and I shall address when stocks are getting close and whether these resistance will be adjusted and/or moved up, so as to protect profits.

Methodology

• Relative strength vs. sector and index
• At/near 26-week and/or 52-week highs
• Positive momentum and/or Upward sloping moving averages on multiple timeframes
• Lack of DeMark exhaustion on daily, weekly, monthly and/or in combination based on TD Sequential and/or TD Combo indicators
• DeMark “TD 13 countdown Buys” utilizing TD Sequential and/or TD Combo indicators at/near lows on multiple timeframes
• Elliott-wave theory
• Positive momentum divergences (at/near lows for buy candidates), Lack of deterioration within its sector and at/near upper quartile of its annual range
• Above-average bullish bases for lengthy timeframes which might precede technical breakouts
• Short-term downtrends within existing intermediate-term uptrends which provide attractive risk/reward opportunities
• Leading stocks within sectors poised to benefit from cyclical upturns

Additions

• PepsiCo – PEP -1.00%

Despite PEP’s choppy performance for much of 2022, this lies within 2% of all-time highs and has shown little to no real deterioration in recent months.  PEP has broadly outperformed both SPX and its Consumer Staples sector relatively speaking and volume has been supportive of recent strength, spiking on weekly gains during the month of October which gives confidence of the possibility of further strength.  While weekly momentum gauges show some minor negative divergence given this sideways consolidation since December 2021, this past October’s month-end close represented a new all-time high monthly close.  Moreover, gains look likely to $187 initially with intermediate-term resistance found between $197-$202.  Overall, it would require a move back under $160.98 to change this outlook, and this is considered an appropriate level for support on long positions.

• United Health – UNH 1.54%

UNH looks quite attractive technically following its short-term basing pattern as part of an intermediate-term uptrend.  Despite the stock’s sideways movement since April of this year, UNH has shown little to no real deterioration like what’s occurred in the broader market.  Both absolute and relative trends are favorable, and an upcoming breakout back to new all-time highs looks likely in the weeks ahead.  The formation of an ascending triangle pattern typically bodes well for an upcoming breakout, as these kinds of patterns are normally resolved in the direction of the move leading into the consolidation.  Upside resistance above $558 lies near $589, then $627, with intermediate-term resistance at $651.  Key Support lies at $482.

Deletions

• Eli Lilly and Co – LLY 0.74%
• Principal Financial Group – PFG -0.07%
• Freeport McMoRan – FCX 0.87%

The “Upticks” List

Sector Summary

Sector Outlook

Healthcare Sector

Overweight – Healthcare’s outperformance has strengthened over the last month following its confirmation of a breakout to the highest levels since early 2020 in relative terms to the S&P 500.  While Pharmaceutical and Biotech still look to be outperformers over Healthcare services and Medical Devices, it’s interesting that Biotech continues to show excellent technical strength despite Treasury yields having not really rolled over just yet.  Outside of Energy, Healthcare is my favorite technical sector for Q4 outperformance.  Within this group, I’m choosing to remove LLY for near-term overbought reasons along with the presence of several intermediate-term DeMark signs of exhaustion, particularly on monthly charts which could be problematic in the months ahead.  While I’d love to reconsider LLY after consolidation, the extent of its recent run-up makes this one to consider taking profits given the warnings.  In place of LLY, I’m picking United Healthcare UNH 1.54% , given its basing activity within striking distance of new all-time highs.  This looks more appealing from a risk/reward perspective in the short run.  Favorite longs include REGN, HUM, and new addition UNH.

Information Technology Sector

Technology took an abrupt turn lower this past month given the about-face in interest rates back higher into early November.  Relatively speaking, this weakness brought about a near breakdown in Equal-weighted Technology vs the SPX which needs to be monitored closely in the days ahead. Any break of relative support vs. SPX would cause Technology to dive to new two-year relative lows vs SPX, resulting in a real headwind for benchmark indices.  Given that rates haven’t turned down as quickly as expected, I’m betting that Tech weakness likely underperforms a bit more in the weeks to come.  Therefore, while I had banked on Tech to rebound into year-end, I think it’s worth lowering my technical reading on this sector to Neutral from Overweight, and keeping a close eye on the real possibility of a technical breakdown in the next couple weeks. Key stock to favor: ON.

Financials Sector

Similar to Industrials, the Financials sector has thrived in recent weeks relatively speaking, and Bank outperformance has allowed for relative strength back to former highs of the last six months vs S&P.  Technically however, I’m not counting on this outperformance continuing, and expect Financials to stall out near this key level of several prior highs.  Overall, given that my analysis favors rates starting to peak out in the next month, I feel like lowering this group’s attractiveness after this big rise makes a lot of sense.  I’ll lower Financials to Neutral from Overweight.

Energy Sector

The Energy sector’s outperformance has continued in recent weeks with relative charts of Equal-weighted Energy vs SPX hitting the highest levels in nearly four years.  In the short run, while momentum has started to approach overbought levels, I’m still confident that Energy shows better relative strength than most if not all other sectors, and Energy remains my favorite sector in the month of November.   Counter-trend exhaustion signals could appear into December which might allow for some backing and filling in Energy and potentially kick off some mean reversion out of this sector into Spring 2023.  However, in the short run, fading Energy looks premature, and this group remains a technical favorite.  Key Energy names to focus on: MPC and HES.

Utilities Sector

Recent underperformance has resulted in Utilities breaking intermediate-term uptrend lines on an absolute basis while relative charts have violated one-year uptrend lines vs SPX.  As the lower pane of this Utilities chart shows, RYU vs SPX has pulled back to test Summer lows and cannot afford to undercut this without expecting meaningful underperformance.  At present, enough damage has occurred to suggest Utilities should be ranked Neutral which would go to Underweight if its “Neckline” support is broken in the weeks ahead. 

Materials Sector

Evidence of US Dollar rolling over has resulted in Materials turning sharply higher over the last week, but yields have not yet turned down as quickly.  As shown above, the relative performance of Equal-weighted Materials vs SPX looks more appealing than when viewing the sector in absolute terms, as this remains in an absolute downtrend since this past Spring.   Overall, given weak seasonal trends for the US Dollar in Q4, staying long Materials should make sense.  However, the US Dollar index looks to be near important support and should take some time before making a larger breakdown.  Thus, taking off some exposure given recent gains in both NEM and FCX makes sense.  

Industrials Sector

The outperformance in Industrials has continued in recent weeks, with Equal-weighted Industrials now having successfully broken out to the highest levels vs. the SPX in years as of this past week.  It’s thought that this group might be sniffing out an eventual peaking out in the US Dollar, which is now facing a seasonally tough time into end of year and has already been weakening a bit lately.  Overall, this group deserves to be raised to Overweight from Neutral given this success in having achieved a new yearly high vs. SPX on a relative basis.  While this doesn’t help S&P much given its weighting, it does look technically significant. 

Consumer Staples Sector

The rally from mid-October helped the Staples sector regain some of its weakness, but relative charts of Equal-weighted Staples vs SPX have largely trended sideways since May of this year after a sharp period of six-month outperformance from last November’s lows.  Overall, relative breakouts vs SPX cannot be ruled out, and one needs to watch if Staples undercut the one-year uptrend line also in the weeks ahead.  At present, this six-month consolidation suggests a Neutral view is correct, and selectivity is important.  Favorite stocks include GIS, MNST and PEP.

Consumer Discretionary Sector

Similarly to Healthcare, Discretionary managed to successfully hold Spring 2022 lows on recent retest attempts. Subsequent strength retraced 38.2% of its prior drawdown, and RCD has exceeded the downtrend from late 2021 in relative terms to SPX. Yet, intermediate- term downtrends remain intact on RCD vs SPX making this a “Neutral” and a group that requires more strength to argue for overweight status. Nonetheless, Discretionary has successfully broken out relatively vs Staples and has been a better performer than many Defensive groups over the last month. Overall a group that could become an overweight with strength back over August peaks; Yet for now, Discretionary is Neutral and selectivity is a must. Favorite longs include ORLY and LEN.

Communications Sector

Despite recent weakness in stocks like META, the entire Communications Services sector remains quite negative technically, and has trended lower in Equal-weighted terms relatively vs SPX for the last 20 months.  Until/unless this sector can manage to turn higher in a manner that will exceed downtrends vs. SPX, this sector will remain a technical underweight.  I am removing GOOGL from my list given its weakness under support in the last month.

Real Estate Sector

REITS have attempted some mild stabilization after the relative breakdown to new yearly lows back in September 2022.  Unfortunately, Treasury yields have not rolled over as quickly as expected to offer any kind of stability to this sector.  Absolute charts of EWRE show prices having held its current intermediate-term channel support , but it’s still imperative for EWRE to exceed $32 to expect that REITS might show some better relative performance. Bottom line, a rolling over in Treasury yields might be necessary before this sector can begin to outperform.