Profits Aplenty As The Warming Trend Continues To Thaw The Markets, For Now

Profit taking is to be expected when stocks zoom as fast as they have since hitting a possible corona bottom. The S&P and DOW started the week in red, but the NASDAQ found its way above water by the end of Monday’s regular trading hours. Mixed markets are encouraging as Wall Street acts selectively and not in panic driven sell or buy mode pushing everything in one direction. It’s yet another sign that the worst for stocks could be in the rearview mirror.

Goldman Sachs agrees saying they believe the focus is shifting towards how to re-open the economy. Just two weeks ago, the investment bank told clients that the S&P 500 could bottom at 2,000. Now, Goldman believes the federal reserve and governments will employ “whatever it takes” policies, which should limit downside for stocks. At least for now anyway.

Much like the coronavirus pushed the US and world into unknown waters, nobody has spent trillions and trillions and trillions before and politicians want to spend more. Who can say for sure how flooding the world with so much liquidity will play out? I’ll take a crack at few likely outcomes, higher inflation and taxes. A redo of the late 70s? God, I hope not.

As for right now, our momentum model is firmly bullish and indicates the pressure will be on stocks to move higher. However, our readings are reaching inflated levels. It means stock prices could burst higher in the near-term but be prepared for selling to follow. The Leadership model continues to be green but did weaken a touch last week. It’s nothing to be too concerned with at the moment, as it just confirms what we see with our momentum readings; stocks could move higher with a fall to follow.

On the other hand, our longer-term market type measuring stick remains bearish with a strong likelihood that big moves will continue to be the norm.

We see a couple of natural, technical barriers overhead as the benchmark indexes aren’t that far away from resistance levels that happen to be neighbors with the indexes’ respective 50-day moving averages. The NASDAQ could run into selling at 8,400-ish, the DOW between 24,950 and 25,000, and the S&P around 2,900.

SECTOR WATCH

As a child, I used to count the seconds between the booms of thunder to determine if the storm was moving closer or away from the bedroom I shared with my little brother. It appears the sounds of stocks crashing are moving farther apart. As such, we can begin to look beyond sheltering from the storm and start thinking about how to recover from the damage.

Since the coronacrash started, we’ve put the sector watch on hold. Now that we have a sense of what’s done and what’s to come, we can put the gloves on and get to work.

With interest rates set to zero by the Federal Reserve board, it’s not surprising to see homebuilders as the top performing sector on our leaderboard last week.

One of the byproducts of historically low interest rates should be strong home sales. Investors who want exposure to homebuilders might consider SPDR S&P Homebuilders ETF (XHB). The exchange traded fund (ETF) pursues investment results that mirrors the total return performance of the S&P® Homebuilders Select Industry index, which includes Homebuilders, Building Products, Home Furnishings, Home Improvement Retail, Homefurnishing Retail, and Household Appliances.

XHB is down more than 25% to start 2020 with a 52-week range of $23.95 to $49.35 and has a current dividend yield of 1.41%. Its top five holdings include:

  • The Home Depot, Inc. (HD)
  • Masco Corporation (MAS)
  • Lowe’s Companies, Inc. (LOW)
  • Lennox International Inc. (LII)
  • NVR, Inc. (NVR)

Longer-term, low interest rates should drive high demand for housing, which should benefit SPDR S&P Homebuilders ETF. In the shorter-term, any stock market weakness could push XHB to support levels between $28 and $30. Its monthly chart shows extended support at $27.50-ish dating back to 2013.

Considering the worst of the corona crisis is likely over, XHB’s downside should be limited to $24. If it were to close below $24, we’d considering selling. That’s approximately $8 downside compared to roughly $17 upside to the 52-week high. A $2 to $1 reward to risk ratio is acceptable in our opinion.

May all your trades be profitable,

Rich Meyers
Investing-Trends.com