Category: Means to a Trend

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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Top Charts from the Real Estate Sector

All is right in the world.

We’ve traditionally categorized Real Estate as a boring, ‘risk-off’ sector, akin to Health Care, Utilities, and Consumer Staples, but all throughout 2022, Real Estate was indistinguishable from large cap growth. It was one of the more interesting relationships of the year.

As we turned our calendars to 2023, market leadership took a sharp turn in favor of growth stocks, as Information Technology, Consumer Discretionary, and Communication Services surged. Real Estate tagged along for the ride.

Today, things are right back where they belong.

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It’s a Growth Problem

The NASDAQ just fell for the second consecutive week – the first time it’s done that all year.

Don’t be fooled by a couple of disappointing declines for the large cap stock indexes, though. This isn’t a market where demand has completely dried up and investors are rushing for the exits. If it were, we’d be seeing broad declines in stocks, and risk-off areas of the market would be outperforming.

That’s not what’s happening. Instead, the trouble is quite narrow: this market has a growth problem.

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Top Charts from the Energy Sector

Is there a sector right now that’s stronger than Energy? It seems every single stock in the group is rising – and that’s because every one of them is.

Our favorite way to quickly identify uptrends and downtrends is to compare a stock’s price to the level and slope of a moving average of trailing prices. If the current price is above a rising moving average, then that stock is in a technical uptrend. If a stock is trading below a falling moving average, it’s in a downtrend.

Right now, EVERY Energy stock in the S&P 500 is trading above a rising 50-day and a rising 100-day moving average. No other sector comes even close to matching that strength.

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Top Charts from the Consumer Discretionary Sector

From failed moves tend to come fast moves in the opposite direction. Is that what’s happening here for the Consumer Discretionary sector?

Despite its strong performance so far in 2023, the sector is still more than 25% from its prior bull market peak. For context, only Real Estate has failed to recover more of its decline.

It looked like Discretionary was poised to play catchup when it was the top performing sector in June. So far, though, prices have been unable to absorb resistance from last summer’s highs. That puts a ceiling on near-term gains for the sector.

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Weak Breadth? Not Anymore

Remember just a few short months ago, when weak market breadth was the hottest topic around?

Stock indexes shook off the short-lived March banking crisis and broke out above key resistance levels in early May. Then they kept on going. Fueled by a handful of mega cap growth names, prices rose further and faster than just about everyone expected. And with the hype around AI accompanying the move, the word ‘bubble’ got tossed around more than a few times.

Any time stock prices rally, you can always find someone that’s bearish about the future – some people have made a career out of finding reasons to be negative. In May, though, the reasons weren’t all that hard to find. The majority of stocks weren’t participating.

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Checking in on Energy Prices

The bears fumbled their opportunity.

Crude oil was vulnerable below $73. It even dropped as low as $63 one morning, before buyers stepped in to defend it. Now, prices are back above the first key level of resistance. That doesn’t mean we want to be aggressively buying oil here – at least not until we get above $83 and really show signs that a new uptrend is in place – but we can have confidence that the immediate threat of lower oil prices is now in the rearview mirror.

That’s what we wrote about crude two weeks ago in our Energy sector note. Since then, oil prices have continued to surge. We gapped above the 200-day moving average for the first time in almost a year, leaving sellers gasping for breath in the rearview mirror.

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