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A couple of weeks ago Chris Senyek published an interesting note on a fundamental attribute, which should help provide alpha regardless of the market backdrop. In the note - Portfolio Strategy Weekly Report: Stock Picker's Alert: Buy 'ICE' - Incremental Free Cash Flow - Buy 'ICE' in a 'Risk On, Risk Off' Environment, he recommended that investors consider accumulating positions in ‘High ICE’ companies, which is based on his proprietary model which identifies names generating the highest incremental free cash flow returns on equity. Historically, this strategy has worked across the market cycle. On the flip side, a low ICE reading coupled with elevated valuation does not bode well for forward returns. Chris’ note provided a number of long and short candidates, a handful of which were confirmed by the technicals (ICE in the Spring?).
Two of the better-performing sectors off the February lows, Utilities and REITs, have each begun to struggle at key resistance levels. In the case of Utes, this test coincided with a developing overbought condition (a rarity in today’s market), as well as an easing in bearish sentiment as measured by XLU short interest (Wolfe’s Steve Fleishman highlighted in his daily yesterday (4/12/2018). The oversold condition helped provide some stability to the decade long uptrend, and while the overall response was lackluster, the bull can take comfort that support has held…for now. The trend in utilities remains firmer than REITs, but as both bond proxies see their rallies stall out at resistance, a break below their respective February lows would clearly call into question the longer-term structure of the charts.
While a great environment for day traders (If you have the ability to successfully navigate the daily whipsaws), the reality is that equity markets have made very little progress over the past three weeks. The recent churning has left the S&P right back where it ended on March 22nd, and while stocks hover north of their 200-day moving average, the inability to generate any upward momentum continues to gnaw at me. Prior oversold conditions have been swiftly met with an upward thrust- not the apprehensive price action that we have witnessed as of late. That said, while we all wait for equities to signal their next move, a handful of charts are displaying the trends and momentum we favor. Today’s note takes a look at these compelling setups across the macro landscape.
As the market’s day to day gyrations continue to be driven by the macro or the latest tweet, the start of earnings season can’t come soon enough for most. With first quarter earnings season kicking off towards the back half of this week, I thought that it would be helpful to review the charts of the select few that get the ball rolling. While some remain sound (FAST, BLK, DAL, PNC and JPM), others (WFC and C) have suffered a fair amount of deterioration, and one (BBBY) looks poised to renew its multi-year downtrend.
During times of market turmoil, a select few are immune to some degree of trend damage on an absolute basis. That’s why that in times like this, an industry’s or stock’s relative trend, becomes a truly differentiating factor, helping to distinguish the haves from the have nots. I mention this because transports have been pretty resilient given the market’s struggles over the past couple of months. The rails and truckers are at the core of this strength; unfortunately, the same cannot be said of the airlines, as momentum has been waning over the last several months. While I am hesitant to step into a majority of the names until bullish momentum presents itself, SKYW and ALGT stand out on the long side.
Given the increasingly risk-off environment, Chris Senyek’s note caught my attention this morning (04/02/18) - Portfolio Strategy Weekly Report: Stock Picker's Alert: Buy 'ICE' - Incremental Free Cash Flow - Buy 'ICE' in a 'Risk On, Risk Off' Environment. In the note, Chris recommends that investors consider accumulating positions in ‘High ICE’ companies, which is based on his proprietary model that identifies names generating the highest incremental free cash flow returns on equity. Historically, this strategy has worked across the market cycle. On the flip side, a low ICE reading coupled with elevated valuation does not bode well for forward returns. Chris’ note provided a number of long and short candidates, and I thought that it would be helpful to highlight those names where the charts confirm.
Interesting price action yesterday (03/27/18) would be an understatement. I was working up a note on small caps when I had to leave mid afternoon to catch a flight. That’s when the bears turned what had been a quiet, if uneventful day for stocks into gut check time for the bulls or as McCroskey so eloquently put it -https://youtu.be/hd1ciPnTGKg. So my apologies for the heavy dose of Russell 2000 charts in today’s piece, but I forgot my laptop at home and it’s probably fitting given their leadership off the February lows - outperformance which I believe has some legs to it (Small Cap's Time to Shine?- 2/16/18).
Today (03/26/18) was a good start, but stocks have their work cut out for them to help repair the damage they have suffered since their peak two months ago. If we zoom in on the S&P 500 since the January 26th peak (chart below), it puts today’s 2.7% move in perspective, as the broader formation looks distributive in nature. I’m encouraged that this lasted oversold rally developed at a higher low, but the bulls need to reclaim 2800 to help ease these shorter-term concerns.
Chris Senyek had his latest “Earnings Quality” report out yesterday (3/21/2018) (see links to note and video tutorial below), so I thought it would be helpful to highlight a few of the names where the technicals lineup with his fundamental concerns. As we all know, regardless of earnings quality, fighting strong price trends and momentum can be a frustrating and money losing proposition. It’s when trends begin to crack and momentum wanes, that I get particularly interested on the short side. Of the stocks discussed in yesterday’s report, Tesla, BioMarin Pharmaceutical, Albemarle, B&G Foods, Kratos Defense & Security Solutions, U.S. Silica and Chesapeake Energy possess these attributes, with each exhibiting longer-term absolute and relative distribution. Trade accordingly.
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