In the last five trading days (January 20 – January 26) the broad stock market has extended its long-term uptrend. The S&P 500 index reached new record high of 3,870.90 yesterday, as investors awaited big-tech quarterly earnings releases. The S&P 500 has gained 0.88% between January 20 open and January 26 close.
In the same period of time our five long and five short stock picks have lost 4.22%. Stock picks were relatively much weaker than the broad stock market’s performance last week. Our long stock picks have lost 6.12% and short stock picks have resulted in a loss of 2.32%. The Energy sector has been the strongest in the previous month, but last week there have been significant declines in oil stocks. Hence that relatively big drawdown of our portfolio.
There are risks that couldn’t be avoided in trading. Hence the need for proper money management and a relatively diversified stock portfolio. This is especially important if trading on a time basis – without using stop-loss/ profit target levels. We are just buying or selling stocks at open on Wednesday and selling or buying them back at close on the next Tuesday.
If stocks were in a prolonged downtrend, 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.
Our last week’s portfolio result:
Long Picks (January 20 open – January 26 close % change): COP (-10.11%), PXD (-8.09%), C (-9.59%), SPGI (+0.42%), APD (-3.25%)
Short Picks (January 20 open – January 26 close % change): WBA (+2.56%), MNST (-1.48%), SPG (+7.28%), EQR (+3.85%), TTWO (-0.62%)
Average long result: -6.12%, average short result: -2.32%
Total profit (average): -4.22%
Stock Pick Update performance chart since Nov 18, 2020:
Let’s check which stocks 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, January 27 – Tuesday, February 2 period.
We will assume the following: the stocks will be bought or sold short on the opening of today’s trading session (January 27) and sold or bought back on the closing of the next Tuesday’s trading session (February 2).
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.
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 gained 4.33% from the closing price on December 23. The strongest sector was Consumer Discretionary XLY, as it gained 8.33%. The Energy XLE gained 6.34% and Health Care XLV gained 6.09%.
On the other hand, the weakest sector was Industrials XLI, as it lost 0.96% in a month. The Consumer Staples XLP lost 0.11% and Materials XLB gained 2.62%.
Based on the above, we decided to choose our stock picks for the next week. We will choose our 5 long and 5 short candidates using trend-following approach:
- buys: 2 x Consumer Discretionary, 2 x Energy, 1 x Health Care
- sells: 2 x Industrials, 2 x Consumer Staples, 1 x Materials
MCD McDonalds Corp. - Consumer Discretionary
- Stock may break above two-month-long downward trend line
- The resistance level is at $217.50 and support level is at $207.50
ORLY O’Reilly Automotive, Inc. – Consumer Discretionary
- Possible upward reversal following the recent correction
- The resistance level is at $465 – short-term upside profit target level
WMB Williams Cos., Inc. – Energy
- Stock trades within a consolidation following downward correction – uptrend continuation play
- The support level is at $20.75 and resistance level is at $22.75
COG Cabot Oil & Gas Corp. – Energy
- Possible bull flag pattern – uptrend continuation play
- The resistance level is at $19-20 – short-term upside profit target level
CVS CVS Health Corp. – Health Care
- Short-term upward reversal - uptrend continuation play
- The support level is at $72 and the resistance level is at $76
JCI Johnson Controls Intl plc – Industrials
- Stock broke below the short-term upward trend line – possible medium-term downward reversal
- The support level is at $49 – short-term downside profit target level
TT Trane Technologies Inc – Industrials
- Possible medium-term topping pattern after breaking below upward trend line
- The resistance level is at $155.00 and support level is at $140.00-142.50 – short-term downside profit target level
EL Estee Lauder Cos. - Consumer Staples
- Downtrend continuation play
- The resistance level is at $255
- The support level is at $230-240 – short-term downside target profit level
SYY Sysco Corp. - Consumer Staples
- Possible medium-term topping pattern
- The support level is at $68-70 – short-term downside target profit level
DD DuPont de Nemours, Inc. - Materials
- Stock broke below its short-term upward trend line – possible medium-term downward reversal pattern
- The support level is at $78
In our opinion, the following stock trades are justified from the risk/reward point of view between January 27 and February 2:
Long: MCD, ORLY, WMB, COG, CVS
Short: JCI, TT, EL, SYY, DD
Stock Trading Strategist
Sunshine Profits - Effective Investments through Diligence and Care