A stock pickers market

October 15, 20138 Comments

I’ve been telling our clients that the expected volatility leading into the debt ceiling decision would likely be the trigger insofar as spending the cash allocations I’ve been holding. So far we’ve deployed less than half of our cash on market dips in the past 2 weeks. I expect to spend most, although perhaps not all, of my remaining cash over the coming week on any pullbacks.

My fundamental analysis associate Craig Aucoin and I have been a bit more focused on individual stocks than usual. Typically, our equity model holds broad market and sector ETFs and individual stocks split more or less evenly. For this years “best 6 months” seasonal play, however, we’re not quite so convinced that broad markets or even broad sector plays will offer the most upside. That’s because, although the US market in particular certainly looks to be entrenched in a bull market, it’s also looking like there may be some rotation happening as the prior leaders start to take a breather. Divergences in various momentum studies such as MACD suggest that the former leaders, which tend to hold the highest capitalization within the indices most of us watch, are losing steam.

S&P nearterm

Breadth is also diverging. Note that on the cumulative Advance Decline line we see flat peaks where the S&P500 made higher highs.

AD LINE

So where to hunt? I mentioned Europe and the MSCI EAFE charts a couple of weeks ago as one place to play the broad indexes. Here’s the link: https://www.valuetrend.ca/?p=2487

Beyond that, certain stocks such as Texas Instruments TXN-N and AIG-N are breaking out (we own TXN). We also bought CAE-T on a large breakout pattern recently too.

The day of the index investor may be ending, at least for the balance of this leg in the bull market. I’m convinced that a healthy 20% correction (bear) may visit us later next year. I’ll blog on my reasons for that potential soon. Meanwhile, although I do expect markets to continue rising over the next 6 months or so, I believe the upside for the indexes will be far less lucrative than they have been. Thus, my advice is to pick good stocks with sound technical and fundamental profiles going forward.

 

8 Comments

  • Keith, I was just looking at that breadth divergence in the S&P recently. Normally I trade ETF’s, but I’ve been seeing better opportunity in individual names…and TXN was one of them. I’m specifically interested in Tech. The Nasdaq monthly chart is similar to TXN in that it broke a 10yr resistance and seems to be headed to it’s former tech-bubble highs.

    Reply
    • Hi Gogi
      We’ve been looking at some interesting long-term sideways stocks like TXN that have just started breaking out. Its my thought that some of these laggards may become the next leg up for the market. This is where its good to use some fundamentals in your analysis–you need the catalyst and value to allow the breakout to continue. CAE is a smaller capped story that makes great sense to us too. they’ve been getting some nice orders, and had a nice breakout at $11-ish.

      Reply
  • Also if you look at the monthly S&P 500 chart it is parabolic (meaning >45 degrees) since about 11/30/11. Throw in the shorter term negative divergences and I think we are in for a decent correction that very likely retrace all of that parabolic advance back to 1120

    Reply
    • Wow–aggressive downside target!
      Nonetheless–I agree on a correction. The hard part is predicting when that may happen. I’m going to post something soon on a potential cycle due to peak next year–for what that is worth. Perhaps that fits in with your observation.

      Reply
  • Sentiment Trader has mentioned several times in the past few weeks that when investors are less confident, they tend to go with ETFs. When they are more confident, they go with individual stocks.

    Two areas of concern: EquityClock this morning (October 17) points out the significant bearish wedges in several high profile areas, i.e. SPX, Russell 2000, Nasdaq. And Pring, in his book “Technical Analysis Explained” stated that when the SPX and the Dow are “out of gear” with each other, dastardly (my word, not his) things can happen. Is that happening now?

    Be careful out there!

    Reply
    • Fred–fully agree that there are some possible warning signs. I’m focused on the momentum indicators–way overbought right now. So I still hold some cash (30% actually) in my equity model.
      But a wedge formation is not bearish until it breaks down–up until that point, just as any bearish formation (head and shoulders tope, double tops, etc) – no formation should guide us to a bearish conclusion until a penetration through the support line happens.
      Also–the Dow is behind the S&P of late–but that’s really been just since the re-allocation of the index of a number of weeks ago– it may explain the different performance that has suddenly emerged.

      I agree with Jon, though, that there is a setup potentially for a correction happening. Best to watch and see what happens (ie if the supporting trendline cracks)–hedge your bets with a bit of cash.

      Reply
  • Keith,

    you mentioned in this blog you have deployed part of your cash. I can’t find in previous blog when you have started to deploy. I try to be in-sync with you, you always have great forecast.

    Reply
    • Hi Andre’
      First–thanks for the kind comments. I do usually try to give some idea of when I’m buying–but it wont be up to the moment. http://www.smartbounce.ca/?p=2463 offered a hint of when I was looking for a pullback and buying opportunity. As a trader, I tend to watch the daily movement and jump as best I can when it looks time to do so. Things move so quickly, I cant blog on when exactly I will move.
      I will also tell you that given the overbought conditions we are looking at, we are looking for a near termed pullback to finish our purchasing. Again though, when it happens, I’ll be so busy trading I wont be able to write a blog that day!

      Reply

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