Stocks lost ground, as corona virus and economic slowdown fears dominated headlines in the recent days. The S&P 500 index has lost a stunning 7.5% since last Wednesday's open. But our five long and five short stock picks were profitable, as they gained almost 2% in the same period! Let's check which stock could magnify S&P's gains in case it rallies, and which stocks would be likely to decline the most if S&P plunges. Here are our stock picks for the Wednesday, February 26 - Tuesday, March 3 period.
The Stock Pick Update for the Wednesday, February 19 - Tuesday, February 25, 2020 period resulted in a gain of 1.97%. The S&P 500 index has lost 7.46%, so our stock picks have been relatively much stronger than the broad stock market. Our short stock picks gained 8.71% and they outperformed the index on the short side. Long stock picks lost 4.78%, but the whole ten-stock-picks portfolio performed incredibly well in time of a stock market breakdown.
If stocks were in a more prolonged downward correction, being able to profit anyway, would be extremely valuable. Of course, it's not the point of our Stock Pick Updates to forecast where the general stock market is likely to move, but rather to provide you with stocks that are likely to generate profits regardless of what the S&P does.
This means that our overall stock-picking performance can be summarized on the chart below. The assumptions are: starting with $100k, no leverage used. The data before Dec 24, 2019 comes from our internal tests and data after that can be verified by individual Stock Pick Updates posted on our website.
Below we include statistics and the details of our three recent updates:
- Feb 25, 2020
Long Picks (Feb 19 open - Feb 25 close % change): XEC (-7.66%), BSX (-5.67%), NUE (-5.31%), PEG (-2.69%), SPG (-2.59%)
Short Picks (Feb 19 open - Feb 25 close % change): AEE (-3.55%), CBRE (-8.58%), INTC (-10.03%), SLB (-13.40%), A (-7.97%)
Average long result: -4.78%, average short result: +8.71%
Total profit (average): +1.97% - Feb 18, 2020
Long Picks (Feb 11 open - Feb 18 close % change): PSX (-2.96%), DD (+1.00%), PNC (-2.96%), NRG (+2.83%), EXR (+3.66%)
Short Picks (Feb 11 open - Feb 18 close % change): NEE (+3.91%), PLD (+1.76%), AMD (+4.33%), PXD (-2.28%), DOW (-3.92%)
Average long result: +0.32%, average short result: -0.76%
Total profit (average): -0.22% - Feb 11, 2020
Long Picks (Feb 5 open - Feb 11 close % change): PSX (-0.11%), MS (+1.68%), DD (-1.09%), PEG (-1.98%), NTAP (+3.59%)
Short Picks (Feb 5 open - Feb 11 close % change): ETR (+1.93%), NOW (-2.72%), PEAK (+0.69%), HAL (-2.07%), STT (+0.91%)
Average long result: +0.42%, average short result: +0.29%
Total profit (average): +0.36%
The broad stock market has reached historically high levels recently. The breathtaking correction in December of 2018 was followed by the record-breaking comeback rally. The late October - early November breakout led to another leg higher, as the S&P 500 index broke above 3,300 mark. But the recent sell-off suggests that investors should prepare for volatility. If the market reverses higher, which stocks are going to beat the index? And if it continues lower from here, which stocks are about to outperform on the short side?
We will provide stock trading ideas based on our in-depth technical and fundamental analysis, but since the main point of this publication is to provide the top 5 long and top 5 short candidates (our opinion, not an investment advice) for this week, we will focus solely on the technicals. The latter are simply more useful in case of short-term trades.
We will assume the following: the stocks will be bought or sold short on the opening of today's trading session (February 26) and sold or bought back on the closing of the next Tuesday's trading session (March 3).
First, we will take a look at the recent performance by sector. It may show us which sector is likely to perform best in the near future and which sector is likely to lag. Then, we will select our buy and sell stock picks.
There are eleven stock market sectors: Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Technology, Communications Services, Utilities and Real Estate. They are further divided into industries, but we will just stick with these main sectors of the stock market.
We will analyze them and their relative performance by looking at the Select Sector SPDR ETF's.
Let's start with our first charts (charts courtesy of www.stockcharts.com).
There's S&P 500's 30-minute chart along with market sector indicators for the past month. The S&P 500 index has lost 5.95% since January 24. The strongest sector was Real Estate XLRE, as it gained 0.66%. The Utilities XLU has lost just 0.18% and Consumer Staples XLP lost 3.12%.
On the other hand, the weakest sector was Energy XLE again, as it lost 13.80%. The Industrials XLI lost 7.22% and Health Care XLV lost 6.78%.
Based on the above, we decided to choose our stock picks for the next week. We will choose our top 3 long and top 3 short candidates using a contrarian approach, and top 2 long and top 2 short candidates using trend-following approach:
Contrarian approach (betting against the recent trend):
- buys: 1 x Energy, 1 x Industrials, 1 x Health Care
- sells: 1 x Real Estate, 1 x Utilities, 1 x Consumer Staples
Trend-following approach:
- buys: 1 x Real Estate, 1 x Utilities
- sells: 1 x Energy, 1 x Industrials
Contrarian approach
Top 3 Buy Candidates
BKR Baker Hughes Company - Energy
- Technically oversold - short-term upward correction play
- Potential resistance level of $20 (upside profit target level)
MMM 3M Co. - Industrials
- Technically oversold - short-term upward correction play
- Positive divergence between the price and RSI indicator
- Potential resistance level of $154-156 (upside profit target level)
PFE Pfizer, Inc. - Health Care
- Technically oversold - short-term upward correction play
- The price is at the support level of $33.50-34.00, marked by previous lows
Top 3 Sell Candidates
MAA Mid-America Apartment Communities Inc. - Real Estate
- Breakdown below upward trend line
- Downward correction play
- Stock may reach the support level of $138-140, marked by previous local highs
EIX Edison Intl, Inc. - Utilities
- Potential head and shoulders topping pattern
- Breakdown below the upward trend line
- The resistance level of $78-79
CLX Clorox Co. - Consumer Staples
- Potential rising wedge topping pattern
- Negative technical divergences
- The resistance level of $169-170
Trend-following approach
Top 2 Buy Candidates
EXR Extra Storage Space Inc. - Real Estate
- Stock remains above the support level of $107, marked by previous consolidation
- Resistance level and profit target level of $113-115
WEC WEC Energy Group, Inc. - Utilities
- The support level of $100, marked by previous consolidation
- No confirmed downward reversal signals so far
- Potential upside profit target and the resistance level of $103
Top 2 Sell Candidates
OKE Oneok, Inc. - Energy
- Breakdown below the upward trend line
- Negative technical divergence confirming downtrend
- The resistance level of $76
CMI Cummins Inc. - Industrials
- Bear flag - rising wedge pattern following December-January decline
- Potential downside price target of $150, marked by the previous low
Conclusion
In our opinion, the following stock trades are justified from the risk/reward point of view between February 26 and March 3:
Long: BKR, MMM, PFE, EXR, WEC
Short: MAA, EIX, CLX, OKE, CMI
Thank you.
Paul Rejczak
Stock Trading Strategist
Sunshine Profits - Effective Investments through Diligence and Care
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Disclaimer
All essays, research and information found above represent analyses and opinions of Paul Rejczak and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Paul Rejczak and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Rejczak is not a Registered Securities Advisor. By reading Paul Rejczak's reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Paul Rejczak, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.
