February 2020 Trend-Following Market Update:
Well the jury is in: For stock market bulls the end of January was much worse than the start! With the Corona Virus contagion heating up, the market is finally blowing off some steam. So let’s take a closer look at what might come next.
Now before we get into this week’s market recap, I wanted to share one quick update. Because as you might know, all the charts in my posts are provided by TrendSpider and just this week they’ve launched a new stock screening feature!
I know this was a missing piece for a lot of you who were curious about TrendSpider. So I wanted to let you know about this exciting update. Now they offer it all: From stock scanning (idea discovery), to the beautiful charting (trade management), and smart alerts (entry signals), this charting platform now has the whole end-to-end experience for swing traders. You can read my whole TrendSpider review here.
Okay, now let me show you some charts.
Stock Market Update – February 2020 (Part 1):
It’s the second month of 2020 and it looks like we’re going to be pulling back. In last week’s market update, I said I wouldn’t be surprised to see the selling continue. And that’s exactly what happened over the last few trading days.
Here’s the daily chart of SPY to give you a more detailed view of last week’s price action:
Notably, SPY gapped down to start the week. And although price recovered a bit after that, Friday’s selling saw us close the week at the lows. The handy annotation from TrendSpider shows a drop of nearly 3.5% over the last 7 trading days.
It does look like SPY might be coming into a potential support level around the 50-day moving average. So I’ll be watching carefully for any signs of stability and consolidation. Now to zoom out a little bit, I also want to show you the weekly chart.
This will give you a better sense of the extent of the pullback, in the context of the longer-term uptrend:
Again, it isn’t too encouraging for bulls that price closed at the lows of the week. But longer-term, this may just be a common correction in a bigger bull market (even though the headline risks feel a little worrisome).
Speaking of headline risk, while there was selling across the board in US stocks, as you might expect it was emerging markets that actually took the brunt of the selling as the spread of Corona Virus accelerates across Asia.
Here’s the EEM chart, which gave back weeks of gains and is now back in a sideways trading range:
Unfortunately, I think it may take some time for EEM to base out and stabilize before bouncing back to 52-week highs. Plus, with industries keeping factories closed and airlines cancelling flights, this pullback does seem supported by a fundamental narrative (at least for now).
Back in the US, earnings season also continues to unfold. FactSet reports 45% of S&P-500 companies have reported earnings so far this season, with 69% of these stocks beating their expectations.
While this sounds good, it’s actually below the 5-year average. With 94 more S&P-500 companies scheduled to report next year, the data will continue to roll in so double-check any stocks you own for earnings announcements.
Some of the highlights this week were the mixed results in large cap tech. Notably, after poking to new all-time highs, Facebook took a hit when it reported soft guidance.
On the other hand, AMZN is finally starting to move again. The company smashed expectations and popped up to all-time highs before fading a bit during Friday’s sell off.
So hopefully more earnings beats like this can help the indexes get moving again. If the market cooperates, I’ll certainly be watching AMZN for new highs given the strong underlying fundamentals.
In the meantime though, bonds further reinforced the risk-off lean. I highlighted the breakout in TLT last week, and that momentum continued as stocks faded:
So looking ahead, I’m still focused on leading stocks that are acting well. But my expectations for immediate price appreciation are a little bit muted given the top-down weakness we’re seeing in the indexes. That said, I want to be ready if things get moving up again.
February 2020 Trend Following Trade Idea:
As I was saying, the market has been acting a little soft lately. And since most individuals stocks tend to move in a convoy with the index, it might be a few more weeks before momentum really gets moving again.
But on the other hand, focusing on stocks with relative strength that are holding up well technically – especially when they’re supported by strong fundamentals – can be a way to position yourself for upside.
One such idea I have on my radar this week is CBRE Inc (CBRE). Even though price faded a bit Friday, it’s still acting well and the weekly chart provides an easy trade plan:
Personally, I picked up shares of CBRE earlier last week and just have a stop below the recent consolidation zone. I like the risk/reward and am cautiously optimistic thing long-term uptrend can keep moving. You could also opt to wait for a breakout to new highs before jumping aboard.
The other thing that impresses me about CBRE are the fundamental operating trends that underlie the stock price performance.
Here’s some data from Morningstar to give you an idea of what I mean.
The thing I really like about this business is the consistency. Year after year, CBRE has been able to keep revenue trending higher, rising by a factor of 4 over the last 7 years. Wow!
Just as importantly, the revenue growth has also translated to earnings-per-share growth. While operating margins have come under some pressure in recent years, it’s not enough to offset the rapid top-line expansion. This is also reflected in the big growth in free-cash-flow.
Over the long-term, it’s been my experience that stock prices do tend to track fundamental performance. And with CBRE firing on all cylinders, I’m hoping the good times can keep rolling. The company is expected to report earnings at the end of February, so it may be able to keep trending higher until then, if the broad market cooperates.
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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