The broad stock market remained within a short-term consolidation in the last five trading days (July 22 - July 28). The S&P 500 index has retraced some of its recent advance after getting closer to 3,300 mark. More than four months ago on March 23, the market sold off to new medium-term low of 2,191.86. It was a stunning 35.4% below February 19 record high of 3,393.52. The corona virus and economic slowdown fears erased more than a third of the broad stock market value. But the index has rallied back closer to record high again.
The S&P 500 index has lost 1.12% between July 22 and July 28. In the same period of time our five long and five short stock picks have lost 2.83%. Stock picks were relatively weaker than the broad stock market. Our long stock picks have lost 4.59% following a large INTC stock sell-off and short stock picks have resulted in a loss of 1.07%.
Could we have avoided such loss? Our 10-stock (5 long and 5 short) portfolio's weekly decline has been relatively large in the last five trading days. However, a 20% loss in one stock accounts for "only" 2% loss of 10-stock 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.
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:
- July 28, 2020
Long Picks (July 22 open - July 28 close % change): MLM (-5.87%), MCD (+1.57%), INTC (-19.84%), XOM (-1.36%), IRM (+2.58%)
Short Picks (July 22 open - July 28 close % change): COG (-0.38%), WY (+6.86%), SPGI (-1.77%), APD (-0.40%), HD (+1.02%)
Average long result: -4.59%, average short result: -1.07%
Total profit (average): -2.83%
- July 21, 2020
Long Picks (July 15 open - July 21 close % change): DOW (-1.40%), INTC (+2.83%), MCD (-0.47%), XOM (-0.84%), HST (-1.54%)
Short Picks (July 15 open - July 21 close % change): COG (+4.57%), VNO (-5.52%), AON (+2.30%), LIN (+1.36%), AAPL (-2.01%)
Average long result: -0.28%, average short result: -0.14%
Total profit (average): -0.21%
- July 7, 2020
Long Picks (July 1 open - July 7 close % change): INTC (-2.67%), F (+0.33%), PPG (+2.17%), DTE (-0.35%), AIG (-5.93%)
Short Picks (July 1 open - July 7 close % change): XEL (+2.00%), BLK (+0.91%), EOG (-5.72%), MSFT (+2.52%), EBAY (+8.14%)
Average long result: -1.29%, average short result: -1.57%
Total profit (average): -1.43%
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, July 29 - Tuesday, August 4 period.
We will assume the following: the stocks will be bought or sold short on the opening of today's trading session (July 29) and sold or bought back on the closing of the next Tuesday's trading session (August 4).
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 6.98% from the closing price on June 26. The strongest sector was Materials XLB, as it gained 11.95%. The Consumer Staples XLP gained 9.74% and Utilities XLU gained 9.49%.
On the other hand, the weakest sector was Energy XLE, as it gained 1.15% in a month. The Technology XLK gained 4.01% and Financials XLF gained 6.33%.
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 trend-following approach, and top 2 long and top 2 short candidates using contrarian approach:
- buys: 1 x Materials, 1 x Consumer Staples, 1 x Utilities
- sells: 1 x Energy, 1 x Technology, 1 x Financials
Contrarian approach (betting against the recent trend):
- buys: 1 x Energy, 1 x Technology
- sells: 1 x Materials, 1 x Consumer Staples
Top 3 Buy Candidates
IFF Intl Flavors & Fragrances - Materials
- Stock remains above the upward trend line
- Potential medium-term uptrend continuation
- The resistance level of $132.5-137.5
WBA Walgreens Boots Alliance, Inc. - Consumer Staples
- Potential short-term uptrend continuation pattern - bull flag
- The resistance level of $44 (short-term upside profit target)
- The support level remains at $38-39
ED Consolidated Edison, Inc. - Utilities
- Stock broke above medium-term downward trend line
- The resistance level and upside profit target level at $82-84
- The support level is at $70
Top 3 Sell Candidates
HES Hess Corp. - Energy
- The price has bounced off previous local highs recently
- The resistance level is at $52.50
- The support level is at $40-45 (downside profit target level)
XLNX Xilinx, Inc. - Technology
- Potential medium-term downward reversal pattern
- Downward correction play
- The support level is at $96 - short-term downside profit target level
SPGI S&P Global Inc. - Financials
- Potential medium-term topping pattern - rising wedge pattern
- The support level is at $330-340 (initial downside profit target level)
Top 2 Buy Candidates
XOM Exxon Mobil Corp. - Energy
- Stock may resume its medium-term uptrend after breaking above the downward trend line
- The resistance level of $50 - upside profit target level
WU Western Union Co. - Technology
- Stock trades within a consolidation following breaking above the downward trend line
- Upside profit target and the resistance level of $24-25
Top 2 Sell Candidates
APD Air Products and Chemicals, Inc. - Materials
- Stock trades within a potential medium-term topping pattern
- Technical overbought conditions - RSI indicator
- The support level is at $255-265 - initial downside profit target level
KO Coca Cola Co. - Consumer Staples
- Potential short-term topping pattern
- The support level of $46-47 - short-term downside profit target level
In our opinion, the following stock trades are justified from the risk/reward point of view between July 29 and August 4:
Long: IFF, WBA, ED, XOM, WU
Short: HES, XLNX, SPGI, APD, KO
Stock Trading Strategist
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