Best Stocks to Battle Inflation Fears for May 2022

As such, we’ve seen big selling over the past six months by Big Money investors like institutions and pension funds. Inflation and equity downturns can be a nasty combo punch for investors, and we’re seeing it now.

Markets and Big Money in the Last Six Months

My research firm, MAPsignals, tracks the Big Money because we believe that’s what tends to move markets. Right now, there’s huge selling (red bars) and an almost complete lack of buying (blue bars):

But there have been some sectors doing well despite the mass market downfall. Three are energy, materials, and utilities. They’re rising because of inflation and the current geopolitical situation’s effect on supply chains.

Chart, histogram Description automatically generated

But that doesn’t mean the only winners are there, just that those sectors are generally benefiting from current market conditions. See, when it comes to inflation, investors need stocks that can handle storms. Those tend to be strong, big companies with healthy balance sheets as well as pricing power that enables paying dividends. Here are five stocks that can go a long way to help battle inflation: ADM, MOS, CTVA, EOG, and JNJ.

Archer-Daniels-Midland Company (ADM) Analysis

Up first is Archer-Daniels-Midland, the agricultural commodities giant.

Companies with pricing power can do well in inflationary environments. With ADM focused on food staples and suffering from supply chain issues, it is experiencing elevated prices and strong demand at the same time. It’s weathered the storm well and pays a nearly 1.9% current dividend. Stocks like ADM are worthy of attention, especially on pullbacks. Check out Archer-Daniels-Midland:

  • 1-month performance (-10.8%)
  • Year-to-date performance (+25.0%)
  • Recent Big Money buy signals

To show you what our Big Money signals look like on a stock, have a look at all the buys in ADM over the past year:

Looking more broadly, Archer-Daniels-Midland has been a high-quality stock for years. The blue bars in the chart below show when ADM was a high-ranking stock likely being bought by a Big Money player, according to MAPsignals. When you see a lot of blue, like ADM has recently, it can be very bullish:

Source: www.MAPsignals.com

Those blue signals indicate Big Money buying and solid fundamentals. As you can see, Archer-Daniels-Midland’s sales and earnings growth have been strong, making it worthy of attention:

  • 1-year sales growth rate (+32.4%)
  • 3-year EPS growth rate (+19.1%)

The Mosaic Company (MOS) Analysis

Next up is Mosaic, a fertilizer and feed company that pays a nearly 0.8% current dividend.

Check out these technicals for MOS:

  • Year-to-date performance (+51.0%)
  • 1-month performance (-19.6%)
  • Recent Big Money buy signals

As markets have turned from growth to value and geopolitical tensions have risen, stocks in certain sectors, like materials, have benefitted. MOS is definitely one of those, as you can see the Big Money buying that’s been prevalent the last year:

Now let’s look long-term. Below are the top buy signals for Mosaic since 2009. The Big Money has been on it in waves:

Source: www.MAPsignals.com

Now let’s look under the hood. As you can see, Mosaic has had strong recent sales growth and owns a healthy profit margin:

  • 1-year sales growth (+42.3%)
  • Profit margin (+13.2%)

Corteva Inc. (CTVA) Analysis

Another inflation-beating name is Corteva, an agricultural firm focused on solving the world’s biggest food challenges. It currently pays a 1.0% dividend.

Strong inflation-beating stocks almost always have Big Money buying support. Corteva has had that in the past year, and its recent dip may provide an attractive buy opportunity.

  • Year-to-date performance (+13.0%)
  • 1-month performance (-10.3%)
  • Historical Big Money signals

Below are the blue Top 20 Big Money buy signals CTVA has made in the last year. Look at how Big Money drives up prices. That’s the JUICE!

Source: www.MAPsignals.com

Let’s look deeper. Earnings growth for Corteva has been impressive. I expect more of the same in the coming years. Its minimal debt is also encouraging for the future.

  • 3-year EPS growth rate (+121.9%)
  • Debt/equity ratio (+6.2%)

EOG Resources, Inc. (EOG) Analysis

Number four on the list is EOG Resources, which is a low-cost oil and natural gas company. It currently pays a dividend of slightly more than 2.5%.

Here are the technicals important to me:

  • 1-month performance (-2.6%)
  • Year-to-date performance (+36.5%)
  • Historical Big Money signals

With the energy sector on a rise for a while, EOG has seen a lot of Big Money buying:

Given that, it’s not surprising EOG Resources is a Big Money favorite recently. But it’s been like that for some time. Below are the Big Money Top 20 buy signals for EOG since 2004:

Source: www.MAPsignals.com

Let’s look under the hood. EOG Resources sales have jumped quite a bit and its profit margin keeps investors happy:

  • 1-year sales growth rate (+99.1%)
  • Profit margin (+23.6%)

Johnson & Johnson (JNJ) Analysis

Our last inflation beater is Johnson & Johnson, the health care giant. It’s involved in many aspects of health care and pays a nearly 2.6% dividend currently. JNJ has been strong since markets got rocky last fall:

Check out these technicals:

  • 1-month performance (-2.1%)
  • Year-to-date performance (+3.0%)
  • Historical Big Money signals

JNJ is a high-quality stock. It’s made the MAPsignals Top 20 buy report 113 times since 1990. As you can see below, it’s been a Big Money favorite:

Source: www.MAPsignals.com

Now let’s look below the surface a bit. JNJ sales have been growing, it’s highly profitable, and the stock is not too expensive right now:

  • 1-year sales growth rate (+13.5%)
  • Profit margin (+22.3%)
  • Forward price-to-earnings ratio (+17.2x)

Bottom Line

ADM, MOS, CTVA, EOG, and JNJ represent the best stocks to battle inflation for May 2022. This group has been able to handle volatile markets well. They’re strong, fundamentally-sound stocks that pay dividends and are set up for success in inflationary environments.

To learn more about MAPsignals’ Big Money process please visit: www.mapsignals.com

Disclosure: the author holds long positions in EOG in personal and managed accounts.

Contact

https://mapsignals.com/contact/

Sell High-Beta Stocks. Buy Low-Volatility Stocks. It’s The Business Cycle

Summary

A sound investment strategy takes advantage of the economic environment.

The economic environment drives the relative performance of investments.

The business cycle tells which stocks should be in your portfolio: high-beta vs low volatility.

The main forces driving the business cycle

There are three main types of economic indicators: leading, coincident, and lagging. The lagging indicators are the most important ones for investors because they determine the length of the business cycle and the severity of the economic correction needed to bring them down so the economy can expand again.

Inflation, interest rates, and labor costs are the most important lagging indicators. A rise in inflation reduces consumers’ purchasing power. The rise in interest rates makes purchases of anything less affordable – housing and autos in particular. Rising labor costs hinder profitability. Consumers react to the rise in inflation and interest rates by cutting first the purchase of big-ticket items. This is also the time consumer confidence of the University of Michigan declines sharply.

The slowdown in housing and auto sales are the first developments reflecting the economy is downshifting. Such slowdowns are reflected in equity prices. Coincident indicators such as employment and sales eventually also begin to sputter.

The investment opportunity in equities takes place when the leading indicators – those which were the first to signal the slowdown – are going to rise again.

One of the most important tenets of the business cycle is the slowdown will continue until the causes that created the slowdown are brought under control.

The main causes of the slowdown are the rise in the main lagging indicators: inflation and interest rates. The slowdown will continue as consumers reduce spending until their purchasing power restored again. This happens when inflation and interest rates decline. This is also the time when labor costs decrease, improving business profitability.

As retail sales increase because of rising consumers’ purchasing power, the other coincident indicators also rise: employment, production, and income. These developments will reinforce themselves and the positive loop will continue until the economy overheats.

This is the time when the lagging indicators raise their ugly heads, and the business cycle starts all over again.

Where are we now?

The lagging indicators are rising. Consumer prices keep moving higher – up more than 8%. Interest rates – short-term and long-term – have reached new highs for this business cycle. The two-year Treasury yield soared from 0.2% to 2.6% in the last 12 months. The stock market, an important leading indicator, shows no gains since June 2021 as of this writing. Auto sales and housing have been weakening after several months of rising inflation and interest rates.

Consumers cut spending on big-ticket items first when income after inflation declines as it is happening now (see graphs of buying conditions from University of Michigan survey below). In other words, an increase in the lagging indicators (inflation and interest rates) lead a peak in the leading indicator consumers’ buying conditions (see above chart).

The business cycle is just past Point 7 (see first chart above). The next trends will be slower growth in the coincident indicators. Retail sales and income after inflation are already contracting. Production and employment are still strong. They will have to weaken to reflect cuts in production to reduce inventories.

Inflation and interest rates will decline following more weakness in the coincident indicators (sales, income, production, and employment). In the meantime, growth in business activity will continue to decline until inflation and interest rates drop enough to increase consumers’ purchasing power. It will be a long and drawn-out process.

Economic growth drives sectors’ performance

The environment faced by the financial markets is slower economic growth. This is an important trend because the sectors outperforming the market when the business cycle declines, reflecting slower economic growth, are the non-cyclical sectors (XLP, XLU, XLV, XLRE) ( see chart below, energy being the exception).

The chart shows the percent change over the last 200 days. During a period of stronger growth cyclical stocks (XLI, IYT, XLF, XLE, XLB, XME) outperform the market. The strong performance of the non-cyclical sectors confirms the stock market is past its phase of fast growth.

High-beta and low volatility stocks respond to economic forces

High-beta (ETF: SPHB) and low-volatility stocks (ETF: SPLV) perform in different ways depending on the trend of the business cycle as shown on the following chart.

The above chart shows two sets of graphs. The upper panel represents the graph of the ratio SPHB/SPLV. The busines cycle indicator computed in real-time from market data and reviewed in each issue of The Peter Dag Portfolio Strategy and Management is in the lower panel.

High-beta stocks (SPHB) outperform low-volatility stocks (SPLV) (the ratio in the uppere panel rises) when the business cycle rises, reflecting stronger economic growth due to declining or stable inflation and interest rates.

However, low-volatility stocks (SPLV) outperform high-beta stocks (the ratio in the upper panel declines) when the business declines because of rising inflation and interest rates – as it has been happening since late 2021.

Key takeaways

  • The leading indicators will continue to decline reflecting rising inflation and interest rates.
  • During such time low volatility stocks (SPLV) will continue to outperform high-beta stocks (SPHB).
  • The leading indicators, such as stock prices, autos, housing, consumer sentiment of the University of Michigan, will bottom and rise again following a decline in inflation and interest rates.
  • The decline in inflation and interest rates will be preceded by declines in the coincident indicators (sales and income after inflation, production, and employment).
  • This will be the time when high-beta stocks (SPHB) start outperforming low-volatility stocks (SPLV).

Stock Market Crash Déjà Vu? Follow This Market Rotation Sequence

Since the topping formation manifested in January 2022, S&P 500 has dropped 14% off the peak with increasing volatility both to the upside and to the downside. This is mainly due to the unfolding of the Wyckoff distribution pattern (as explained in the video before the selloff happened in the past 2 weeks) and the stock market rotation where the smart money flows from the growth theme and the technology sector to the defensive sectors like consumer staple (XLP), utilities (XLU), health care (XLV) and the commodities including the energy sector (XLE).

Stock Market Rotation During Wyckoff Distribution

The outperformance in the energy sector since January 2022 is especially obvious as shown in the comparison chart between S&P 500 E-mini Futures (ES) and the energy sector (XLE) below:

Since January 2022, S&P 500 experienced a selloff as a sign of weakness followed by a weak rally while the energy sector (XLE) rallied up to all time high (highlighted in green).

Since 21 April 2022 XLE had a biggest down wave (highlighted in orange), which is considered as a Wyckoff change of character to stop the uptrend into a consolidation or even a reversal. This is a significant event because this kind of the stock market rotation is similar to what happened during Wyckoff distribution in 2008 before the market crash. Refer to the chart below:

In late 2007 S&P 500 formed a topping formation followed by a break down as a sign of weakness. In January till May 2008, S&P 500 had a weak rally up barely tested the axis line where the previous-support-turned-resistance while the energy sector (XLE) created a new high (as highlighted in green).

The next selloff in XLE (highlighted in orange) signaled a breakout failure, which is also a Wyckoff change of character that led to a reversal. This is similar to what’s currently unfolding in XLE as shown in the first chart. The market rotation sequence during the Wyckoff distribution phase is almost the same in 2022 and 2008.

Wyckoff Distribution Pattern in S&P 500: 2022 vs 2008

Let’s compare the price structure of S&P 500 in 2022 and 2008 to find out the similarity of the Wyckoff distribution pattern, as shown below.

From the top pane, S&P 500 had a Wyckoff distribution formation formed by the end of 2021 followed by a break down (highlighted in red) in January 2022 as a sign of weakness (SOW1). The stock market breadth at that time also confirmed the bearish bias as I discussed in the video.

The subsequent price movements including the automatic rally (AR), potential upthrust after distribution (UTAD) and the sign of weakness (SOW2), which is still unfolding, are similar to 2008’s as shown in the bottom pane.

Now the S&P 500 is testing the last line of the support at 4100. Should 2008’s price structure be a decent analogue for reference, a last point of supply (LPSY) as a weak rally (highlighted in orange) can be expected before the market collapse.

S&P 500 Price Prediction When Market Crash

Check out the 2 bearish scenarios that lead to a market crash with the price target and what you can expect for S&P 500 to violate this crash (at least for the time being) in the video below.

Although there was presence of demand shown up last week in S&P 500, the bull needs to prove itskself to rally away from the vulnerable area and to at least commit above 4300 to avoid the bearish scenario to crash below 4100. Visit TradePrecise.com to get more stock market insights in email for free.

Bank Stocks Will Keep Underperforming. It’s The Business Cycle.

Summary

Bank stocks are sensitive to interest rates.

Interest rates are sensitive to the strength of the business cycle.

The attractiveness of bank stocks depends on the trend of the business cycle. Not interest rates.

My article of January 2021 concluded:

“…… rising yields at the beginning of a business cycle is good news for bank stocks. Yields rising to levels damaging the economy and causing the business cycle to decline is bad news for the banking sector.”

To recognize what is happening now it is useful to review how the banking sector responds to changes in the business cycle.

Chart, pie chart Description automatically generated

Source: The Peter Dag Portfolio Strategy and Management

Business Cycle and Its Phases

The business cycle goes through four distinctive phases. The trends pointing to the end of Phase 4 are:

  • Commodity and inflation are declining.
  • Sales growth is lower than the pace of inventory accumulation.
  • Income after inflation starts rising.
  • Consumer confidence rebounds as consumers respond favorably to the decline of inflation, interest rates, and to the rise of real income.

These favorable developments create the conditions for the business cycle to move into Phase 1. Sales increase because of consumers’ improved financial conditions. Business is forced to boost production to build up inventories to respond to the rising demand. Business will have to hire new people, buy raw materials, and increase borrowing to improve and possibly expand capacity.

These activities place a floor on commodities and interest rates. As the positive feedback continues, improved sales feed into rising inventories, rising employment, and increased borrowing.

This expansion benefits the banking sector, of course, because it provides the liquidity needed to fuel the positive loop thus creating even more growth. This is the time when bank stocks outperform the market.

There is a point, however, when the high level of production places upward pressure on commodities, interest rates, and inflation. The business cycle enters Phase 2, reflecting an even stronger economy.

But rising commodities, interest rates, and inflation eventually have a negative impact on the finances of consumers as it is happening now. Consumer confidence peaks and then declines. Demand for goods slows down.

Business recognizes inventories are now rising too rapidly due to the slower demand and are having a negative impact on earnings. Production is curtailed. Purchases of raw materials are reduced. Hiring is cut. Improvements and expansions of capacity are delayed resulting in lower borrowing, an unwelcome development for banks.

What Phase Are We in Now?

Chart, line chart, histogram Description automatically generated

Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management

The above chart shows the business cycle indicator updated in real time from market data and reviewed in each issue of The Peter Dag Portfolio Strategy and Management. It shows the previous two cycles (2011-2014 and 2014-2020) and the current one started in 2020.

This indicator and data about growth in heavy truck sales, in income after inflation, in retail sales after inflation, and the action of the defensive market sectors (see below) confirm the business cycle is now declining, reflecting slower economic growth. The business cycle is now in Phase 3.

The slowdown process will continue until the causes that produced it are brought under control and consumers recognizes their finances are improving. This new environment will be characterized by the decline in inflation and interest rates. This process will take place in Phase 4, the most painful phase for consumers and the financial markets.

During Phase 3 and Phase 4 the sectors outperforming the markets are utilities (XLU), healthcare (XLV), staples (XLP), REITs, and long duration Treasury bonds.

The performance of the various sectors keeps repeating as the business cycle swings from periods of stronger to weaker growth.

Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management

The sectors outperforming the market over the last two hundred days (except for energy) have been the four sectors mentioned above. Their performance confirms the business cycle is declining, reflecting a weakening economy.

The financial sector, and banks in particular, is a cyclical sector outperforming the market during periods of strengthening business cycle.

Chart, line chart, histogram Description automatically generated

Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management

The above chart shows the ratio of Invesco KBWB bank ETF and the S&P 500 ETF (ratio KBWB/SPY). The ratio rises when bank stocks outperform the market. The ratio declines when bank stocks underperform the market.

The lower panel of the above chart shows the business cycle indicator computed in real-time as reviewed in each issue of The Peter Dag Portfolio Strategy and Management.

The chart shows bank stocks outperform the market (the ratio rises) when the business cycle rises, reflecting a strengthening economy. The ratio declines, reflecting the underperformance of the bank stocks, when the business cycle indicator declines in response to a weakening economy. Chart, histogram Description automatically generated

Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management

The above chart shows regional banks stocks (ETF: KRE) respond like the major center banks stocks to the changes of the business cycle. They outperform the market when the business cycle indicator rises and underperform the market when the business cycle indicator declines. Chart, histogram Description automatically generated

Source: StockCharts.com, The Peter Dag Portfolio Strategy and Management

Even large and well managed banks like JP Morgan (JPM) are not immune to the changes in the business cycle as shown in the above chart. The stock of JP Morgan outperforms the market when the business cycle rises and underperforms the market when the business cycle declines.

Key Takeaways

  1. Bank stocks respond to changes of the business cycle and not of interest rates.
  2. Bank stocks outperform the market when the business cycle rises, reflecting a strengthening economy (Phase 1 and Phase 2 of the business cycle).
  3. There is a point when rising interest rates and inflation cause the business cycle to decline. This is the time when bank stocks start underperforming (Phase 3 and Phase 4 of the business cycle).

Major Indexes Continue To Be Outperformed By Energy & Metals

ETFs like XOP (S&P Oil & Gas Exploration & Production), XME (S&P Metals & Mining), and XLU (Utilities) have been experiencing capital inflows. At the same time, other ETFs such as DIA (30-Industrials), SPY (500-Large Caps), IWM (2000-Small Caps), IYT (Transports), and QQQ (100-Nasdaq Largest Non-Financial) are still in the red for the year.

Our positions in energy and precious metal ETFs netted us a positive return, while our recent trades in the major stock index ETFs had already booked partial position profits, with the remainder of the positions stopping out for a small break-even profit.

As we experience record inflation numbers reported and central banks raising their lending rates, we are keeping our cash ready and closely monitoring key ETF sectors as compared to the major stock index benchmarks for clues regarding our location within the overall economic cycle.

SPY – SPDR S&P 500 ETF TRUST – DAILY SECTOR COMPARISON CHART

Major Indexes SPY

TheTechnicalTraders – TradingView

TACTICAL ETFs FOR ALTERNATIVE STRATEGIES

From time to time, we get questions from our subscribers regarding inverse and leveraged ETFs. Inverse and/or leveraged ETFs are not appropriate for everyone. However, for some experienced traders, these tactical ETFs can provide alternative strategies for use in a bear market.

An inverse ETF is an exchange-traded fund (ETF) constructed by using various derivatives to profit from a decline in the value of an underlying benchmark. Inverse ETFs allow investors to make money when the market or the underlying index declines, but without having to sell anything short.

A leveraged exchange-traded fund (ETF) is a marketable security that uses financial derivatives and debt to amplify the returns of an underlying index. While a traditional exchange-traded fund typically tracks the securities in its underlying index on a 1:1 basis, a leverage ETF may be structured for a 2:1 or even a 3:1 ratio.

These ETFs listed below track the underlying S&P 500 benchmark that represents 500 US large caps as selected by S&P’s Index Committee. These ETFs are examples of both inverse and leveraged ETFs:

  • SPY vs. SH (1:1 or 1x leverage) – SPY (Bull) is the most recognized ETF and is typically listed in the top ETFs for the largest AUM and greatest trading volume. SH (Bear) provides 1:1 inverse exposure to the S&P 500.
  • SSO vs. SDS (2:1 or 2x leverage) – SSO (Bull) seeks a daily 2x return of the S&P 500. SDS (Bear) provides 2:1 inverse exposure to the S&P 500.
  • UPRO vs. SPXU (3:1 or 3x leverage) – UPRO (Bull) seeks a daily 3x return of the S&P 500. SPXU (Bear provides 3:1 inverse exposure to the S&P 500.

SPY – SPDR S&P 500 ETF TRUST – DAILY S&P 500 COMPARISON CHART

The following chart gives us a visual of how the ETFs mentioned above are performing against each other over the past 15-months. It should be noted that inverse ETFs carry unique risks that traders should be aware of before participating in them. Some of the risks associated with inverse ETFs are compounding risk, derivative securities risk, correlation risk, and short sale exposure risk.

Major Indexes SPY

TheTechnicalTraders – TradingView

KNOWLEDGE, WISDOM, AND APPLICATION ARE NEEDED

It is important to understand that we are not saying the market has topped and is headed lower. This article is to shed light on some interesting analyses of which you should be aware. As technical traders, we follow price only, and when a new trend has been confirmed, we will change our positions accordingly. We provide our ETF trades to our subscribers, and in the last six trades we entered in March, all have now been closed at a profit! Our models continually track price action in a multitude of markets, asset classes, and global money flow. As our models generate new information about trends or a change in trends, we will communicate these signals expeditiously to our subscribers and to those on our trading newsletter email list.

Successful trading is not limited to when to buy or sell stocks or commodities. Money and risk management play a critical role in becoming a consistently profitable trader. Correct position sizing utilizing stop-loss orders helps preserve your investment capital and allows traders to manage their portfolios according to their desired risk parameters. Additionally, scaling out of positions by taking profits and moving stop-loss orders to breakeven can complement ones’ success.

WHAT STRATEGIES CAN HELP YOU NAVIGATE The CURRENT MARKET TRENDS?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market and other asset classes across the globe. We believe the markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

Historically, bonds have served as one of these safe-havens, but that is not proving to be the case this time around. So if bonds are off the table, what bond alternatives are there and how can they be deployed in a bond replacement strategy?

We invite you to join our group of active traders and investors to learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

 

Utilities Rising & Transporters Sinking – Sector Rotation Is Providing Clues

Recently, the stock market is beginning to show us signs that the bull market may be coming to an end. Commodities such as energy, grains, and precious metals have all experienced nice rallies. Price action also confirms money flow coming out of transports and into utilities.

SPY – SPDR S&P 500 ETF TRUST – DAILY COMPARISON CHART

SPDR & SPY Chart

TheTechnicalTraders – TradingView

As we review our cycle chart, please note the specific placement of the Transportation, Precious Metal, Energy, and Utilities sectors.

We especially want to focus on the Transportation sector depreciating while the Utility sector appreciates.

These sectors provide us with important clues as to where we are in the current economic cycle.

Stock Market & Economic Performance Graphic

TheTechnicalTraders

UTILITIES SECTOR UP +7.50% YTD

In March 2022, the Dow Jones Utility Average crossed 1,000 for the first time in its nearly 100-year history as the utility sector is significantly outperforming the market this year.

Many investors believe that the XLU is the most effective risk-reducing equity ETF available and may be looking to the utility sector as a safe-haven play.

Other safe-haven markets that we are following closely are Gold, the U.S. dollar, and the Switzerland franc.

XLU – SPDR SELECT SECTOR ETF UTILITIES– DAILY CHART

SPDR & XLU Chart

TheTechnicalTraders – TradingView

TRANSPORTATION SECTOR DOWN -15.92% YTD

The transportation sector has dropped approximately -21.59% from its peak in November 2021. Market cycles are measured from peak to trough. Generally, traders consider a stock index in a bear market when its closing price drops at least 20% from its peak. The move in the XLU from 100.00 to 80.00 also represents a drop of 33.33% of the total 2020-21 bull market move.

On April 1st, the U.S. Department of Labor reported that the number of truck transportation jobs fell in March after 21 consecutive monthly gains. Then on April 8th, Bank of America (NYSE: BAC) downgraded multiple transportation stocks, citing “waving demand and price dives.” Bank of America analyst Ken Hoexter told clients, “Given deteriorating demand outlooks and rapidly falling freight rates, we downgrade ratings on 9 of the 28 stocks in our coverage universe”.

The transportation index was created in July 1884 by Charles Dow and has long been viewed as a leading indicator of the broad market’s direction because economic demand shows up first in shipping orders. Historically, a down-turn in freight indicates a potential broad economic recession.

XTN – SPDR S&P TRANSPORTATION ETF – DAILY CHART

SPDR & XTN Chart

TheTechnicalTraders – TradingView

KNOWLEDGE, WISDOM, AND APPLICATION ARE NEEDED

It is important to understand that we are not saying the market has topped and is headed lower. This article is to shed light on some interesting analyses of which you should be aware. As technical traders, we follow price only, and when a new trend has been confirmed, we will change our positions accordingly. We provide our ETF trades to our subscribers, and in the last six trades we entered this month, five have been closed at a profit, one remains open, and we have locked in partial profits on that one as well! Our models continually track price action in a multitude of markets, asset classes, and global money flow. As our models generate new information about trends or a change in trends, we will communicate these signals expeditiously to our subscribers and to those on our trading newsletter email list.

Successfully trading is not limited to when to buy or sell stocks or commodities. Money and risk management play a critical role in becoming a consistently profitable trader. Correct position sizing utilizing stop-loss orders helps preserve your investment capital and allows traders to manage their portfolios according to their desired risk parameters. Additionally, scaling out of positions by taking profits and moving stop-loss orders to breakeven can complement ones’ success.

WHAT STRATEGIES CAN HELP YOU NAVIGATE The CURRENT MARKET TRENDS?

Learn how we use specific tools to help us understand price cycles, set-ups, and price target levels in various sectors to identify strategic entry and exit points for trades. Over the next 12 to 24+ months, we expect very large price swings in the US stock market and other asset classes across the globe. We believe the markets have begun to transition away from the continued central bank support rally phase and have started a revaluation phase as global traders attempt to identify the next big trends. Precious Metals will likely start to act as a proper hedge as caution and concern begin to drive traders/investors into Metals and other safe-havens.

Historically, bonds have served as one of these safe-havens, but that is not proving to be the case this time around. So if bonds are off the table, what bond alternatives are there and how can they be deployed in a bond replacement strategy?

We invite you to join our group of active traders and investors to learn and profit from our three ETF Technical Trading Strategies. We can help you protect and grow your wealth in any type of market condition by clicking on the following link: www.TheTechnicalTraders.com

Chris Vermeulen
Chief Market Strategist
Founder of TheTechnicalTraders.com

 

Sector Rotation Strategy Reveals The Outperforming Sectors For Trend Trading

The stock market has experienced tremendous volatility since late November 2021 and the 4 major indices such as S&P 500 (ES), Dow Jones (YM), Nasdaq 100 (NQ) and Russell 2000 (RTY) has corrected more than 10% from the peak to the trough in February 2022. Since then, the rally in March 2022 is considered as a Wyckoff change of character, which changed the short-term market environment from downtrend to uptrend.

Due to the high volatility (both to the downside and to the upside) as shown up in the market, picking the right sectors followed by buying the outperforming stocks are the keys to be profitable in stock trading.

Smart money has rotated out from the previous leaderships and progressively into different sectors as a result of the on-going sector rotation. Let’s start with a top-down approach to determine the outperforming sectors below.

Top 4 Outperforming Sectors – XLE, XLP, XLU, XLV

There are two elements to focus on in order to determine the outperforming sectors when analyzing the sector charts using the ETFs, which are the relative strength and the price structure. Refer to the chart of XLE (Energy), XLP (Consumer Staples), XLU (Utilities) and XLV (Health Care) below:

XLE has been in a clear uptrend with higher high and higher low since January 2022 while the relative strength (below the chart and annotated in orange) trending up. S&P 500 is used as a benchmark in the relative strength indicator. Rising in the relative strength means XLE outperforms S&P 500 since January 2022.

XLP, XLU and XLV shows outperformance in the relative strength index since December 2021 while their price just hit a higher high recently.

These 4 sectors – energy, consumer staples, utilities and health care show strong price action with their prices break the previous high while outperforming S&P 500.

Sectors Comparison – XLB, XLRE, XLI, XLF

Next let’s compare XLB (Materials), XLRE (Real Estate), XLI (Industrial) and XLF (Financial) below.

The top 2 charts, XLB and XLRE showed outperformance in the relative strength pane since November and December 2021 yet their prices still did not break above the previous swing high. These 2 sectors outperform S&P 500 yet they are not the strongest because of the price structure, which might take more time to unfold.

XLI and XLF show similar relative strength comparing to S&P 500 while their price structures form lower low and lower high, which is a sign of weakness.

Lagging Sectors – XLK, XLY, XLC

The last 3 sectors, XLK (Technology), XLY (Consumer Discretionary), XLC (Communication Services) are the lagging sectors, as shown below.

Both their price structures and the relative strength trend down with lower low and lower high. These 3 sectors are clearly not in favored by the smart money since December 2021.

It is essential to focus on the outperforming sectors like XLE (Energy), XLP (Consumer Staples), XLU (Utilities), XLV (Health Care), XLB (Materials) and XLRE (Real Estate) and to dive into the outperforming industry groups within the sectors before picking the stocks showing Wyckoff accumulation pattern for trend trading.

Stock Market Outlook Video Using Wyckoff Method

Let’s find out where the prices of S&P 500, Nasdaq 100, Dow Jones and Russell 2000 likely to go to. Watch the video below to determine how to use Wyckoff method to derive a directional bias with the volume and the price action alone. Visit TradePrecise.com to get more stock market insights in email for free.

Best Stocks, Crypto, and ETFs to Watch – Coca-Cola, Microsoft, Shiba Inu in Focus

First quarter earnings season starts this week, with Delta Air Lines Inc. (DAL) reporting in Thursday’s pre-market session. The stock closed at a two-month high on Friday, despite well-publicized Omicron-induced travel disruptions. Traders and investors are looking beyond the next month of soaring infections and into the summer travel season, in which massive herd immunity could finally put the COVID pandemic in the rear view mirror.

Dow component Coca-Cola Co. (KO) and other dividend payers have roared out of the gates in 2022, marking a widespread rotation into equities that can withstand high inflation. Barron’s magazine noted this trend over the weekend, highlighting Coke’s bullish outlook after sub-par 2020 and 2021 stock performance. Of course, these sleepy plays aren’t for everyone but a little exposure in a long-term portfolio goes a long way toward getting a good’s night sleep during market downdrafts.

2021’s top-performing tech stocks have been sold aggressively so far this year, highlighting a market tendency for one year’s big winners to become the next year’s big laggards. Dow component Microsoft Corp. (MSFT) could defy this trend, with strong cloud division growth expected to continue into 2023. Buying signals haven’t gone off yet for Mr. Softee but the pullback is slowly approaching support near 300 that could offer a low risk buying opportunity.

Shiba Inu (SHIB) has had a tough time since an oversold bounce ended at 0.00004000 on Christmas Eve, shedding more than 30% while breaking short-term support at 0.00002820. Bears could retain control for the next few weeks but there is a potential light at the end of the tunnel because the decline is approaching strong support at the 200-day moving average at 0.00002400, which has narrowly aligned with the .786 Fibonacci retracement of the September into October rally wave.

SPDR Select Sector Utilities ETF (XLU) posted the third highest ETF volume on Friday, bouncing at 69 after a 5-day pullback. The fund has spent the last month testing resistance at the February 2020 high at 71.10, with a breakout setting the stage for the strongest gains since 2019. Natural gas prices haven’t risen at the same rate as other fossil fuels and many of these companies generate power through water, nuclear, and other cheap energies, making them less vulnerable to rising commodity prices.

Catch up on the latest price action with our new ETF performance breakdown.

Disclosure: the author held Coca-Cola in a family account at the time of publication.