The Market’s Next Move – Music to your Ears

MARKET VIEW

If you look out the window and see that it is raining outside, you don’t need to tune into the TV weatherperson to learn that it’s raining outside.

With the NASDAQ gaining 4% last week, the S&P and DOW up more 3%, you already know who is back in play, them wild-eyed buyers that had been away, and if they want to buy, you better let them. Yes, the bulls are back in town. (A little Thin Lizzy market riff for your musical, financial entertainment.)

Buyers pushed the S&P and NASDAQ to 52-week highs to start the week. If the DOW can close just a few points higher, it will complete the trifecta. When all the major indexes reach new highs simultaneously, that’s called confirmation of the uptrend.

Our models say it’s highly likely the DOW will join the NASDAQ and S&P as all gathered strength and increased their bullish readings in the last week.

The last time the S&P followed a similar pattern was near the end of September. After rebounding to a new high in late October, the index promptly added a touch more than 100 points (approximately 3.5%). Obviously, nothing repeats exactly; however, patterns can be similar. Like our Thin Lizzy, The Boys are Back in Town, the lyrics aren’t a perfect match to the song, but close enough that you can’t miss the likeness.

SECTOR WATCH

Like the candy counter at the movie theater, there are plenty of sweet, sector choices following a stellar week of market performance. The top 5 performers for the last week are:

  • SPDR S&P Biotech ETF (XBI) +4.61%

All eyes are on the industry as it seeks a vaccination or some remedy for the coronavirus.

  • SPDR S&P Aerospace & Defense ETF (XAR) +3.94%
  • SPDR S&P Metals and Mining ETF (XME) +3.82%
  • PDR S&P Transportation ETF (XTN) +3.47
  • Technology Select Sector SPDR Fund (XLK) +3.21

We do like the view of SPDR S&P Biotech ETF’s chart; however, we put ALPS Medical Breakthroughs ETF (SBIO) in this real estate last week. SBIO is another biotech-based exchange traded fund but centered on smaller companies than XBI. Investors who want to broaden their exposure to the industry could add shares of SPDR S&P Biotech ETF to their holdings. Otherwise, SBIO should hold its own if biotechs continue to attract buyers. It was up 2.81% in the last week.

Although it didn’t make the top performers’ leaderboard, Communication Services Select Sector SPDR Fund (XLC) recorded a buy signal in our technical analysis algorithm. XLC’s relative strength is accelerating and has plenty of headroom to move higher. It’s also on the verge of bullish MACD crossover, which is technical buy signal.

Keeping in our ‘it rhymes’ theme, the last time the ETF followed a similar path, it rallied nearly 12% in the next three-months.

Its top 10 Holding Include:

  1. Facebook, Inc. (FB)
  2. Alphabet Inc. (GOOGL)
  3. Alphabet Inc. (GOOG)
  4. Netflix, Inc. (NFLX)
  5. Charter Communications, Inc. (CHTR)
  6. Activision Blizzard, Inc. (ATVI)
  7. Comcast Corporation (CMCSA)
  8. AT&T Inc. (T)
  9. Verizon Communications Inc. (VZ)
  10. The Walt Disney Company (DIS)

Add the two Alphabet Holdings together and it would take the top spot from Facebook.

STOCK WATCH

Of all the stocks in the Communication Services Select Sector SPDR Fund, Facebook, Inc. (FB) is the most attractive in our view. It offers investors some of the fastest growing earnings, according to analysts’ expectations, and the most revenue growth in the portfolio.

Meanwhile, the social media giant trades with a forward price-to-earnings (P/E) ratio of 19.58 while earnings per share (EPS) are slated to grow at more than 40% for the year. Wall Street has consensus EPS at $9.09. As we type, Facebook trades at 33.14 times the bottom line.

If the P/E held constant during the next 12-months, FB would trade at $301.24 using the street’s current forecast for the next fiscal year. That’s a potential return of 41.4% from its Monday, February 10, 2020 closing price of $213.06.

Some might scoff that a P/E of 33.14 is too high; however, investors paid an average of 44.54 times EPS in the last half-decade while earnings increased at 42.12%; roughly a one to one ratio. As such, its current valuation has room to expand.

Shorter term, investors recently hit the Facebook sell button following their fourth quarter earnings release. The stock price shaved off nearly $25 in a matter of days. It has since recovered about $10 from its post-earnings’ low.

It would not be unusual for traders to test Facebook’s recent intraday low of $201.06. As long as the stock continues to close above the recent bottom, it should rebound. If it were to fall below $200, then 200-day moving average of $193.40 should provide support and would be an attractive strike zone for investors looking to add Facebook, Inc. (FB) to their holdings.

May all of your trades be profitable!

Rich Meyers
Investing-Trends.com