The S&P 500 is approaching its all-time highs on the back of good earnings reports from the Trump tax cuts. Investors have been rewarding companies that beat revenue expectations, while companies that miss expected revenues are being sold.
This makes sense because nearly every company should have better earnings from the tax-cuts, but higher than expected revenues mean the company is winning demand from consumers.
Trouble Ahead?
However, as the market approaches this key level, we are seeing warning signs form. On the charts, the major indices show weakening momentum in the MACD, RSI, and MFI indicators. The bearish divergences in these indicators tell us the indices are lacking the strength to continue much higher.
Inside the S&P 500, we see investors are positioning themselves defensively. The defensive sectors have been out performing the broader market over the last few weeks.
This is a sign that investors are worried about the future of the stock market. Investors tend to buy these sectors because they tend to out perform during downturns and volatility. Defensive positioning coupled with weakening momentum warns us that there is volatility ahead.
Right now, our main priority is to try and manage the expected volatility. We have raised cash, tightened our stops, and opened a long VIX position. This preparation should help us if the stock market starts to fall, like it did in January/February this year.
Although we are expecting volatility, we still want to be prepared to invest near the bottom. We will do this by looking for stocks that have reached a significant support around the same time as the S&P 500. The index has about 5.5% to fall to reach that critical support along the uptrend line.
We have provided five stocks on our watch list. The first three are for breakouts. Breakout stocks are a good fit during this climate because they require conviction in order to breakout. When a stock breaks out, we can assume that investors expect the stock to continue climbing, even if the market as a whole behaves differently.
The other two stocks are provided in the event the S&P 500 does fall the 5.5% to the trend line. We will be looking for these stocks to behave in the same way. We will look to purchase these stocks when they also fall to their trend lines.
LYB
This industrial stock is in a symmetrical triangle. The company is a worldwide chemical producer, and has a trailing P/E ratio of only 8.45.
A positive breakout from this stock could indicate that trade fears are relaxing, and the industrial sector as a whole is making a comeback.
CF
We are putting CF back on our buy list because we sold it to raise cash in our portfolio. The stock is part of the materials sector, which has been under performing, but it has been an outlier as the stock has performed much better than the sector.
HPQ
This technology stock is in an ascending triangle, and is currently sitting near the resistance line.
JPM
We are adding JP Morgan back onto our buy list but as a way to prepare for a rebound after the expected bout of volatility. We will look to buy the stock near its $105 support after we see signs of it bouncing up.
ATVI
Lastly, we are watching ATVI. This gaming company has had quite the rise over the last few years, but now it is facing some downwards momentum. We will be watching this stock to fall back towards its long term trend line before buying.
Conclusion
Overall, we do not expect the market to fall into a bear market. The current sector rotation tells us that short-term volatility is likely to hit the market, but over the long-term, the cyclical sectors are still in control. We will continue to monitor the sector rotation for more clues into the future of the US stock market.
Visit https://www.brtechnicals.com/cautious-optimism-augusts-stocks-to-watch/ to see all of the charts!
Submitted August 20, 2018 at 06:24PM by BR-Technicals https://ift.tt/2w0Tf7Z
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