Which Stocks Could Magnify SP 500’s Gains In A Rally?
Sunshine Profits | Jul 29, 2020 12:13PM ET
The broad stock market remained within a short-term consolidation in the last five trading days (July 22 – July 28). The S&P 500 index has retraced some of its recent advance after getting closer to 3,300 mark. More than four months ago on March 23, the market sold off to new medium-term low of 2,191.86. It was a stunning 35.4% below Feb. 19 record high of 3,393.52. The coronavirus and economic slowdown fears erased more than a third of the broad stock market value. But the index has rallied back closer to record high again.
The S&P 500 index has lost 1.12% between July 22 and July 28. In the same period of time our five long and five short stock picks have lost 2.83%. Stock picks were relatively weaker than the broad stock market. Our long stock picks have lost 4.59% following a large INTC stock sell-off and short stock picks have resulted in a loss of 1.07%.
Could we have avoided such loss?
Our 10-stock (5 long and 5 short) portfolio’s weekly decline has been relatively large in the last five trading days. However, a 20% loss in one stock accounts for “only” 2% loss of 10-stock portfolio. There are risks that couldn’t be avoided in trading. Hence the need for proper money management and a relatively diversified stock portfolio. This is especially important if trading on a time basis – without using stop-loss/ profit target levels. We are just buying or selling stocks at open on Wednesday and selling or buying them back at close on the next Tuesday.
If stocks were in a prolonged downtrend, being able to profit anyway, would be extremely valuable. Of course, it’s not the point of our Stock Pick Updates to forecast where the general stock market is likely to move, but rather to provide you with stocks that are likely to generate profits regardless of what the S&P does.
This means that our overall stock-picking performance can be summarized on the chart below. The assumptions are: starting with $100,000, no leverage used. The data before Dec 24, 2019, comes from our internal tests and data after that can be verified by individual Stock Pick Updates posted on our website.
Below we include statistics and the details of our three recent updates:
– July 28, 2020
Long Picks (July 22 open – July 28 close % change): MLM (-5.87%), MCD (+1.57%), INTC (-19.84%), XOM (-1.36%), IRM (+2.58%)
Short Picks (July 22 open – July 28 close % change): COG (-0.38%), WY (+6.86%), SPGI (-1.77%), APD (-0.40%), HD (+1.02%)
Average long result: -4.59%, average short result: -1.07%
Total profit (average): -2.83%
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– July 21, 2020
Long Picks (July 15 open – July 21 close % change): DOW (-1.40%), INTC (+2.83%), MCD (-0.47%), XOM (-0.84%), HST (-1.54%)
Short Picks (July 15 open – July 21 close % change): COG (+4.57%), VNO (-5.52%), AON (+2.30%), LIN (+1.36%), AAPL (-2.01%)
Average long result: -0.28%, average short result: -0.14%
Total profit (average): -0.21%
– July 7, 2020
Long Picks (July 1 open – July 7 close % change): INTC (-2.67%), F (+0.33%), PPG (+2.17%), DTE (-0.35%), AIG (NYSE:AIG) (-5.93%)
Short Picks (July 1 open – July 7 close % change): XEL (+2.00%), BLK (+0.91%), EOG (-5.72%), MSFT (+2.52%), EBAY (+8.14%)
Average long result: -1.29%, average short result: -1.57%
Total profit (average): -1.43%
Let’s check which stocks could magnify S&P’s gains in case it rallies, and which stocks would be likely to decline the most if S&P plunges. Here are our stock picks for the Wednesday, July 29 – Tuesday, Aug. 4 period.
We will assume the following: the stocks will be bought or sold short on the opening of today’s trading session (July 28) and sold or bought back on the closing of the next Tuesday’s trading session (Aug. 4).
We will provide stock trading ideas based on our in-depth technical and fundamental analysis, but since the main point of this publication is to provide the top 5 long and top 5 short candidates (our opinion, not an investment advice) for this week, we will focus solely on the technicals. The latter are simply more useful in case of short-term trades.
First, we will take a look at the recent performance by sector. It may show us which sector is likely to perform best in the near future and which sector is likely to lag. Then, we will select our buy and sell stock picks.
There are 11 stock market sectors: Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Technology, Communications Services, Utilities and
Real Estate. They are further divided into industries, but we will just stick with these main sectors of the stock market.
Based on the above, we decided to choose our stock picks for the next week. We will choose our top 3 long and top 3 short candidates using trend-following approach, and top 2 long and top 2
short candidates using contrarian approach:
Trend-following approach:
Buys: 1 x Materials, 1 x Consumer Staples, 1 x Utilities
Sells: 1 x Energy, 1 x Technology, 1 x Financials
Contrarian approach (betting against the recent trend):
Buys: 1 x Energy, 1 x Technology
Sells: 1 x Materials, 1 x Consumer Staples
Trend-following approach
Top 3 Buy Candidates
International Flavors & Fragrances Inc (NYSE:IFF) – Materials
– Stock remains above the upward trend line
– Potential medium-term uptrend continuation
– The resistance level of $132.5-137.5
Walgreens Boots Alliance Inc (NASDAQ:WBA) – Consumer Staples
– Potential short-term uptrend continuation pattern – bull flag
– The resistance level of $44 (short-term upside profit target)
– The support level remains at $38-39
Consolidated Edison Inc (NYSE:ED) – Utilities
– Stock broke above medium-term downward trend line
– The resistance level and upside profit target level at $82-84
– The support level is at $70
Summing up, the above trend-following long stock picks are just a part of our whole Stock Pick Update. The Materials, Consumer Staples and Utilities sectors were relatively the strongest in the last 30 days. So that part of our 10 long and short stock picks is meant to outperform in the coming days if the broad stock market acts similarly as it did before.
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