The corona virus and economic slowdown fears are still dominating headlines. We released our last week's Stock Pick Update just before another wave of the broad stock market's sell-off. Then we have seen very volatile market conditions. Was it a bottoming pattern before a rebound or just consolidation before another decline? We will certainly see more volatility in the short-term. 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, March 18 - Tuesday, March 24 period.
The S&P 500 index has lost 10.49% since last Wednesday's open. In the same period of time our five long and five short stock picks have lost 10.07%. They basically followed another huge wave of the broad stock market' sell-off. Our short stock picks lost 2.42% and our long stock picks lost 17.71%. It leads to a conclusion that the recent volatility on the financial markets makes effective stock picking very hard. However, the overall results remain relatively better than the S&P 500 index over last weeks.
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:
- Mar 17, 2020
Long Picks (Mar 11 open - Mar 17 close % change): ADM (-1.26%), AES (-21.68%), SPG (-45.84%), PSX (-23.54%), BAC (+3.77%)
Short Picks (Mar 11 open - Mar 17 close % change): COG (+14.72%), CME (-17.57%), NOC (-1.88%), CLX (+14.35%), WEC (+2.48%)
Average long result: -17.71%, average short result: -2.42%
Total profit (average): -10.07% - Mar 10, 2020
Long Picks (Mar 4 open - Mar 10 close % change): VNO (-8.94%), WBA (+4.26%), PFE (-1.45%), NBL (-40.68%), JPM (-14.92%)
Short Picks (Mar 4 open - Mar 10 close % change): APA (-57.45%), PGR (-0.09%), ROK (-9.59%), EQIX (-2.51%), KR (+9.84%)
Average long result: -12.34%, average short result: 11.96%
Total profit (average): -0.19% - Mar 3, 2020
Long Picks (Feb 26 open - Mar 3 close % change): BKR (-11.98%), MMM (-2.89%), PFE (+0.18%), EXR (-0.96%), WEC (-2.91%)
Short Picks (Feb 26 open - Mar 3 close % change): MAA (-4.20%), EIX (-9.01%), CLX (-0.02%), OKE (-7.87%), CMI (-6.54%)
Average long result: -3.72%, average short result: +5.53%
Total profit (average): +0.91%
The broad stock market has reached historically high levels in February. The breathtaking correction in December of 2018 was followed by the record-breaking comeback rally. But the recent sell-off suggests that investors should prepare for more 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 (March 18) and sold or bought back on the closing of the next Tuesday's trading session (March 24).
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 25.16% since February 18. The strongest sector was Consumer Staples XLP, as it lost "just" 11.69%. The Health Care XLV lost 16.43% and Utilities XLU lost 18.08%.
On the other hand, the weakest sector was Energy XLE again, as it lost a stunning 48.66% in a month. The Financials XLF lost 32.71% and Industrials XLI lost 31.04%.
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:
Trend-following approach:
- buys: 1 x Consumer Staples, 1 x Health Care, 1 x Utilities
- sells: 1 x Energy, 1 x Financials, 1 x Industrials
Contrarian approach (betting against the recent trend):
- buys: 1 x Energy, 1 x Financials
- sells: 1 x Consumer Staples, 1 x Health Care
Trend-following approach
Top 3 Buy Candidates
LW Lamb Weston Holdings, Inc. - Consumer Staples
- Potential bottoming pattern
- Technically oversold - short-term upward correction play
- Resistance level of $60-70 (upside profit target level)
BDX Becton Dickinson and Co. - Health Care
- Breakout above month-long downward trend line
- Potential resistance level at $260-275 (upside profit target level)
PEG Public Service Enterprise - Utilities
- Potential upward reversal pattern - upward correction play
- The resistance level of $50
- Positive divergence between the price and RSI indicator
Top 3 Sell Candidates
COG Cabot Oil & Gas Corp. - Energy
- Stock bounced off resistance level of $20
- The RSI indicator gets close to overbought level
PGR Progressive Corp. - Financials
- Stock price remains below downward trend line
- The resistance level of $80-85
- Negative divergence between the price and RSI indicator
ITW Illinois Tool Works, Inc. - Industrials
- Stock below downward trend line
- The RSI indicator confirms the downtrend
- The support level of around $140 - downside profit target level
Contrarian approach
Top 2 Buy Candidates
SLB Schlumberger Ltd. - Energy
- Potential bottoming pattern
- Technical oversold conditions - upward correction play
- Resistance levels and profit target levels of $19-24
AXP American Express Co. - Financials
- Technical oversold conditions - upward correction play
- Potential upside profit target and the resistance level of $95-105
Top 2 Sell Candidates
HSY Hershey Foods Corp. - Consumer Staples
- Stock price remains below downward trend line
- The resistance level of $140-145
REGN Regeneron Pharmaceuticals, Inc. - Health Care
- The resistance level of $500, marked by local highs
- Potential rising wedge topping pattern
- Negative technical divergence between the price and RSI indicator
Conclusion
In our opinion, the following stock trades are justified from the risk/reward point of view between March 18 and March 24:
Long: LW, BDX, PEG, SLB, AXP
Short: COG, PGR, ITW, HSY, REGN
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.
