What's Worrying About Stocks Now, And Where To Find Value

Consistent with the weakening breadth argument, this past week included that, even while the NASDAQ Composite and the QQQ’s were up over 1% on the week, the Russell 2000 as measured by the iShares Russell 2000 ETF (NYSE:IWM) was down 80 bp’s on the week.

If small-caps weaken or even stay flat and large-cap Tech or the Big 10 of the S&P 500 continue their year-end rally, breadth will continue to flag, and the indices will continue to move higher.

Where Might Value be in today’s S&P 500?

1) Technology and Financials were the bull-market leaders of the 1980’s and 1990’s, and the two sectors that led to 50% corrections in the 2000’s. Obviously there are the secular growth stocks of this bull market which are Facebook (NASDAQ:FB), Netflix (NASDAQ:NFLX), and what I call the “tweeners” Tech stocks that spanned a little of both decades like Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOGL).

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

But look at some of what I refer to as the “original gangsters” or the 1990’s growth stocks that are working off 17-year bases and could be poised for all-time-highs. (Microsoft (NASDAQ:MSFT) hit a new all-time-high in late 2016, and hasn’t looked back. It has been clients' largest position with a couple of exceptions for the last 5 years.

Oracle (NYSE:ORCL) is another ’90’s growth leader trying to firmly break out to all-time-highs and readers still have time to get in on what I think will be much higher prices. Intel (NASDAQ:INTC) and Cisco (NASDAQ:CSCO) are two hardware giants trying to gain some traction. Intel looks technically better than Cisco though. Long all stocks mentioned.

2) Numerous Financial stocks are not too far from all-time highs:

• Schwab (SCHW): $45 to $51 is the 1999, 2000 highs for Schwab and when the stock breaks out of this consolidation, technicians will tell you the stock could run for a while
• Goldman (NYSE:GS): the investment-banking giant needs to trade over $250 per share to break above the 2007 and the early 2017 high. I worry that Goldman is the “last bull market” leadership stock but the stock will continue to generate earnings and revenue growth consistent with the post Dodd-Frank world.
• JP Morgan: JPM broke out to an all-time-high in 2016, sank back after the China devaluation and then broke out above in 2016 and hasn’t looked back.
• Chicago Merc (NASDAQ:CME): its 2007 high was $142 and change and it is almost there. However, readers can also own ICE or the CBOE Holdings (NASDAQ:CBOE) too. CBOE is tied to the VIX and option trading volume. CME’s biggest futures contract by volume is the Treasury pit so a melt-up in Treasury yields is a CME catalyst.
• Also owned are the Financial Select Sector SPDR (NYSE:XLF), the SPDR S&P Regional Banking ETF (NYSE:KRE), SPDR S&P Bank (NYSE:KBE) and the iShares US Financials ETF (NYSE:IYF).

3) Biotech is roughly 20% of the Health Care sector and the Health Care sector is roughly 15% of the S&P 500 by market cap:

iShares Nasdaq Biotechnology (NASDAQ:IBB): large cap biotech ETF hit a high of $400 in late July ’15 and has been building a nice base since then. Biotech seems to outperform when small-caps outperform so if the IBB worries you, own a little SPDR S&P Biotech (NYSE:XBI). The XBI hit a high of $91 and change in mid-2015 and is also working off the correction. It looks closer to the breakout than IBB.

4) Don’t forget Emerging Markets: The iShares MSCI Emerging Markets ETF (NYSE:EEM) and Vanguard FTSE Emerging Markets (NYSE:VWO) are the two longer-serving Emerging Market ETFs that are STILL more than 10% below their 2007 highs. Recently the iShares Core MSCI Emerging Markets (NYSE:IEMG) was bought for clients too. The weaker dollar no doubt helped the emerging market asset class this year, and so I’m waiting for a bought of dollar strength and the next global correction to add to the asset class.

Again the EM’s are still below their 2007 highs.

The struggle is what’s the appropriate weight for EM’s in client accounts: Van Eck recently did a conference call and noted that EM economies are about 15% of global GDP, so a neutral to slightly overweight position relative to the global GDP market cap would seem prudent. Current weighting – depending on the account – is between 3% – 10%.

Conclusion: Other “gangsters” that look poised for a longer-term breakout are names like Coca-Cola (NYSE:KO) and WalMart, which needs to trade over the early, 2015 high of $90 to breakout to all-time-highs once again. I just don't know if WalMart can continue to push that rock up the hill known as Amazon. Walmart (NYSE:WMT) spotted Amazon a 20-year head start before getting serious about e-commerce. Remember, price tells you everything.

The risk advantage is that by buying long-term laggards on the verge of longer-term breakouts, there is less “hot money” in these stocks and more strong hands. And technicians will tell you, longer-term resistance for these stocks, once broken should act as support, which could aid in risk management in a drawdown.

Clients are long all these stocks and ETFs mentioned.

The 2018 strategy will updated with forecasts sometime mid-to-late December ’18.

What is written here for readers is simply what we have done and are doing for clients. (Opinions and positions can change at any time, without an update being provided).

Another blog post was prepared for today, but the above charts and graphs caught my eye, in terms of indicators flashing yellow.

Written By: Brian Gilmartin