In the last five trading days (October 7 – October 13) the broad stock market has retraced a half of its previous week’s advance of almost 4%. The S&P 500 index set a new record high of 3,588.11 on September 2. But then the market fell below February 19 high of 3,393.52. Recently it set a local low of 3,209.45 before going back above 3,500 mark. So, the decline still looks like a downward correction of a 63.7% rally from March 23 corona virus low at 2,191.86.
The S&P 500 index has lost 2.06% between October 14 and October 20. In the same period of time our five long and five short stock picks have gained 0.08%. So stock picks were relatively stronger than the broad stock market. Our long stock picks have lost 0.54% and short stock picks have resulted in a gain of 0.69%.
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:
- October 20, 2020
Long Picks (October 14 open – October 20 close % change): CSCO (-1.63%), NI (+2.03%), CMG (+1.38%), XOM (-1.06%), SHW (-3.41%)
Short Picks (October 14 open – October 20 close % change): WMB (+1.33%), APD (-1.83%), JPM (+0.07%), NVDA (-4.51%), WEC (+1.47%)
Average long result: -0.54%, average short result: +0.69%
Total profit (average): +0.08%
- October 13, 2020
Long Picks (October 7 open – October 13 close % change): CMS (+2.71%), RTX (+0.35%), EQIX (+4.46%), OKE (+8.35%), FB (+6.53%)
Short Picks (October 7 open – October 13 close % change): COP (+4.21%), TWTR (+2.02%), NVDA (+1.78%), AWK (+1.39%), FDX (+3.37%)
Average long result: +4.48%, average short result: -2.55%
Total profit (average): +0.96%
- October 6, 2020
Long Picks (September 30 open – October 6 close % change): SO (+7.13%), SEE (+9.80%), MAS (-2.17%), EOG (-1.23%), FB (-1.27%)
Short Picks (September 30 open – October 6 close % change): CVX (+0.07%), VZ (0.00%), MS (+0.15%), PPL (+5.90%), NEM (-2.67%)
Average long result: +2.45%, average short result: -0.69%
Total profit (average): +0.88%
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, October 21 – Tuesday, October 27 period.
We will assume the following: the stocks will be bought or sold short on the opening of today’s trading session (October 21) and sold or bought back on the closing of the next Tuesday’s trading session (October 27).
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 3.75% from the closing price on September 18. The strongest sector was Utilities XLU, as it gained 10.05%. The Technology XLK gained 7.00% and Consumer Discretionary XLY gained 5.94%.
On the other hand, the weakest sector was Energy XLE again, as it lost 9.58% in a month. The Materials XLB gained just 0.33% and Financials XLF gained 1.08%.
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 Utilities, 1 x Technology, 1 x Consumer Discretionary
- sells: 1 x Energy, 1 x Materials, 1 x Financials
Contrarian approach (betting against the recent trend):
- buys: 1 x Energy, 1 x Materials
- sells: 1 x Utilities, 1 x Technology
Top 3 Buy Candidates
PPL PPL Corp. - Utilities
- Stock broke above medium-term downward trend line - uptrend continuation play
- Possible short-term uptrend continuation pattern – bull flag
- The resistance level is at $29 and a close support level is at $27.50
WDC Western Digital Corp. – Technology
- Stock broke above its recent downward trend line – possible short-term uptrend continuation
- The resistance level of $45
- The support level is at $39
WYNN Wynn Resorts Ltd – Consumer Discretionary
- Possible breakout above short-term downward trend line
- The resistance level of $77.50
- The support level is at $67.50-70.00
Top 3 Sell Candidates
WMB Williams Cos., Inc. – Energy
- Stock trades below over month-long downward trend line
- The support level is at $18.50, short-term downside profit target level
- The resistance level is at $21.50
SHW Sherwin Williams Co. – Materials
- Possible medium-term topping pattern – stock broke below upward trend line
- The resistance level is at $700-720
- The support level is at $640 (short-term downside profit target level)
TROW T. Rowe Price Associates, Inc. – Financials
- Possible medium-term topping pattern
- The resistance level is at $150
- The support level is at $130-140 (short-term downside profit target level)
Top 2 Buy Candidates
XOM Exxon Mobil Corp. – Energy
- Possible short-term uptrend continuation following breaking above downward trend line
- The resistance level of $36-38, support level at $32
LIN Linde plc – Materials
- Possible uptrend resuming following bouncing off support level
- Stock remains above the support level of $230
- The resistance level is at $245-255
Top 2 Sell Candidates
WEC WEC Energy Group, Inc. - Utilities
- Possible medium-term topping pattern – rising wedge
- The support level is at $95 – short-term downside profit target level
NVDA NVIDIA Corp. - Technology
- Possible medium-term topping pattern – double top
- Short-term rising wedge pattern
- The support level of $460-500 – short-term downside profit target level
In our opinion, the following stock trades are justified from the risk/reward point of view between October 21 and October 27:
Long: PPL, WDC, WYNN, XOM, LIN
Short: WMB, SHW, TROW, WEC, NVDA
Stock Trading Strategist
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