December 2019 Stock Market Update and Ideas (Part 1):
Happy Thanksgiving! I hope you had a great weekend with your family and friends. It was a short-but-sweet week in the stock market. And I’m excited to get you up to speed for Monday’s market open.
Now as usual, I’d like to start with charts of the major market indexes. This is a good way to get oriented with the market environment, and set your expectations for reviewing individual stock charts and planning swing trades. So let’s get started!
December 2019 Stock Market Update:
Last week, I pointed out this time of year was historically very bullish. And so far, that’s continued to be the case with US large caps pushing higher for most of the 3.5 day trading week. Here’s the SPY ETF as a proxy for the S&P-500 to illustrate:
After a brief pause last week, SPY continued to coast higher and higher. Prices faded on Friday’s half-day of trading. But overall it was a solid win for the bulls.
And while you might expect large-cap tech stocks to jog up alongside SPY, the small-cap Russell 2000 index stocks also participated. Here’s a look at the IWM ETF to show you this breakout from the 2019 trading range:
With stocks across the market-cap spectrum moving higher, I’m hoping this low-volume holiday melt-up can continue once the turkey hangover wears off.
So looking ahead to next week, it’ll be interesting to see if the latest Hong Kong legislation impacts markets with another front for the trade war; or, if buyers remain in control of the tape. That’s because while US stocks skated higher, emerging markets took a hit.
The big picture of all this is best summed up with the All-Country World Index (ACWI), which faded off the highs to close the week…
So I’ll be watching whether US stocks can keep pulling their weight, or if they’ll succumb to any global weakness. Based on the momentum of US indexes, I’m hoping the former might be possible.
With that in mind, let me show you one of my favourite ideas right now.
December 2019 Trend Following Trade Idea (Part 1):
There are many pockets of strength in the market, but with interest rates back on the floor, one area that continues to grab my attention is the real-estate investment trust (REIT) industry. After a recent pullback, the sector looks like it’s bouncing again.
So here’s the IYR ETF as a proxy for this part of the market:
Overall, this top-down sector strength could be a boon for CBRE Group Inc (CBRE), which is the pick I’m most interested in this week. Take a look at the weekly chart, which looks like it might be ready to start another leg higher:
Personally, I always like to use a trailing stop, with ATR as my guide in terms of stop placement. In this case, a 2xATR stop around $52 is also below the recent consolidation, – a nice coincidence.
Since CBRE closed the week off its highs, you could either buy this pullback to the top of the prior trading range of the last few weeks, or wait for a new high to let the momentum take you in.
Speaking of trends though, it’s not just the technical uptrend that has my attention. Because when you look at the fundamentals of CBRE, they’re something to behold:
As you can see, the fundamental operating metrics all look pretty good. Notably:
- Revenue has more than tripled since 2012! This kind of top-line sales acceleration can be the driver of great stock returns, especially if it’s profitable growth.
- So even though operating margins have come under pressure in the last few years, earnings growth and operating cash flow, have continued to move higher too
To put this in perspective, the chart from Seeking Alpha shows CBRE’s growth in comparison to the sector at large. And overall, it looks like CBRE has consistently outperformed:
It’s this kind of strength that makes me optimistic about the stock price. When you combine the fundamental and technical trends, I think it paints a compelling picture.
Now that said, REITs do often carry a lot of debt. So one check I like to do with highly-indebted companies, is check the interest burden.
With CBRE, you can see above that the interest expense is still under 10% of operating income and only 2% of gross profit. While it makes sense to dive deeper into the terms of this debt, it looks like CBRE has a low hurdle rate for their internal operating leverage. So hopefully they should continue to outperform without undue financial risk.
Now before we finish…
I also want to share my existing trend-following trading positions for US-listed stocks with you. So here they are in a FinViz watch list! Take a look if you’re still itching for more potential trade ideas.
They might be of interest because everything is laid out in charts so you can easily see what’s what.
Because actually, there have also been a lot of great trends this week so I’m quite bullish on many of my existing holdings.
I hope seeing my current stock portfolio helps give you more context on how I’m seeing the current market, AND, where I’m placing my bets.
While I’ve obviously shown you some of my favourite picks for the week ahead, I can also help teach you how to fish for your own trading ideas!
Just keep reading.
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