Wake Me Up When September Ends

I don’t know which direction stocks are headed next. No one does for sure. But whether your portfolio is positioned for equities to rocket higher or prepared for impending doom, it’s always important to understand both the bull and bear cases. By understanding where the risks to your thesis are, you’re more likely to know when your thesis could be wrong, and how to take corrective action.

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Top Charts from the Consumer Staples Sector

The Consumer Staples sector has hovered near the flat line all year, despite a big gain for the benchmark S&P 500 index. Only the Utilities have turned in a worse performance so far in 2023.

Perhaps the final quarter of the year will be a different story? October, November, and December have historically been the best months of the year to own the Staples, so they’re worth watching closely for any signs of a bounce.

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Will Home Prices Ever Come Back Down?

The National Association of Realtors’ Housing Affordability Index is cratering.

You’ve more than likely seen this chart before, but even if you haven’t, there’s a good chance you’re feeling the effects anyway. Whether you’re a first time buyer, upgrading to accommodate a larger family, relocating for work, or just looking for a change in scenery, it’s rarely been more expensive for Americans to buy a home.

The problems aren’t hard to identify. The first is the most obvious: home price increases have accelerated.

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Top Charts from the Tech Sector

We’re not typically prone to hyperbole, but is there any chart more important than this one when it comes to the future of the equity markets?

Information Technology is the biggest S&P 500 sector by far, accounting for more than a quarter of the index. It took Tech 18 months to set new highs after peaking in December 2021, becoming just the second sector to do so (behind the Industrials). Then, just when Tech looked unstoppable, the rally faltered. The group fell 10% through the first half of August, undoing the breakout and forcing us to question whether the trend was set to reverse lower.

We’re still waiting on an answer.

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A ‘Magical’ Scan for Stocks

Back in 2005, Joel Greenblatt introduced his ‘Magic Formula for Investing’ with The Little Book That Beats the Market. The book details a methodical approach that helps investors find some of the cheapest, most well-operated companies and buy them each month for a one-year holding period.

There is nothing “magical” about the formula (or our variations of it), and the use of the formula does not guarantee performance or investment success. Obviously. But Greenblatt’s own results have shown the value utilizing this simple approach.

We’ve adding some of our own flair to the Magic Formula with today’s scan. We combined Greenblatt’s approach with our penchant for following price action and came up with a handful of stocks from each sector that we think are well positioned to outperform. They all have market caps greater than $1B, and they’re all in technical uptrends. Here they are sorted by market cap:

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Waiting on Silver

We keep waiting on silver to take a leadership role.

Prices for silver and gold tend to be highly correlated, but silver tends to move in greater magnitudes. As such, when precious metals are rising, we expect silver to outperform. That’s what we’ve typically seen during gold’s best runs. These days, silver refuses to lead.

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Leaders and Losers – Industry Trends

We put a lot of emphasis on a top-down approach here at Grindstone. Yes, there’s tremendous value to be had in a bottom-up technical approach, too, which is why we sift through thousands of charts of individual stocks each month. When we’re just checking the charts of individual stocks, though, we can miss out on big themes in the market – especially if we aren’t in tune with the fundamental factors that drive each of those individual stocks.

Zooming out helps.

If you’re a regular reader of our work, you’ve probably noticed that our process centers around the 11 GICS sectors. When we take groups of similar companies together, we can better identify the types of companies that are working best, and that can help us identify sustainable trends. And once we’re in the right zip-code, then we can spend our time deciding which companies within that zip-code we want to own.

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