February 2020 Trend-Following Market Update (Part 2):
And we’re back! After the deep pullback two weeks ago, markets around the world rebounded to the upside. So is this a resumption of the long-term uptrend? Or just a sign of more volatility to come? Well…
In this week’s update we’ll look for some clues in the market indexes, before diving into an individual stock chart that’s looking particularly impressive.
To get started then, let’s recap the major market indexes and some of the other popular asset classes to show which way the money is flowing.
February 2020 Market Update (Part 2):
As I was saying, market prices bounced back in a big way this week – nearly recouping the large sell-off of the week before. But all this back-and-forth is leading to an uptick in volatility, which can cause whipsaws and fake breakouts.
On the other hand, large-cap US stocks remain near highs. Take a look at the SPY ETF weekly chart:
One thing you’ll notice in this chart is how I’ve added a short-term ATR measure in the bottom pane (compared to the usual 20-week ATR I use). This simply shows the short-term volatility (ATR over the last 3 weeks), is over 20% higher than the longer-term volatility measure. So we’re definitely seeing an uptick in action as bulls and bears battle it out.
After such a steep run-up the last few months, this volatility could be a sign of caution. But while SPY faded a little off the highs of the week, the Nasdaq 100 ETF continued to trend in a meaningful way:
With this kind of market leadership – and with many large-cap tech names having already reported earnings – it looks like the path of least resistance is higher.
Turning our attention to small caps, the picture is a little it muddier. But at least they were able to hold the recent support level, as shown by IWM here:
A similar picture looks to be taking place in emerging markets. It was nice to see EEM bounce back after the drubbing of two week’s ago. But it’s not quite out of the woods yet.
For now, this relatively trend-less chart indicates the most likely direction for this market segment might be sideways. With the Corona Virus still impacting the world generally and Asian economies in particular, it might be a while before we see any breakouts here.
On that note, it feels like there might be a little bit of a rush towards US-denominated assets. Whether it’s due to a safe-haven move or just a rotation to the states, remains to be seen. But it wasn’t just the Nasdaq charging higher.
Because at the same time, both bonds and the US dollar also maintained their uptrends. Given historical correlations with stocks, this isn’t necessarily what you’d expect.
But observing is better than predicting! And these trends are clear as day to me.
First up, let’s take a look at the US dollar, which has been making higher lows for over 18 months. And with a strong weekly candle from the dollar index this week, could we see a higher-high up next?
Along the same lines, treasury bonds (represented by the TLT ETF) have continued to hold up their momentum as of late. Just take a look at how TLT closed off the lows:
This is a trend I’ve been harping on for a few weeks now. And it’s notable to see bonds holding up as stocks surge, pull back, and surge again.
Now considering this accommodative top-down environment. I think it makes sense to keep looking for breakout trade ideas. And today I have just one such stock pick on my radar to share with you!
Trend-Following Trade Idea For February 2020 (Part 2):
While stocks in general have been trending higher, one area of the market that’s really doing well is consumer stocks. Whether it’s staples or discretionary names, the American consumer groups are bumping and grinding higher, week after week.
And within this group of stocks, one company that’s really standing out to me is Costco (COST).
So given their popularity, I imagine you know this company well. Their huge warehouse style stores are all over North America – and increasingly the world.
As you might expect, these growth trends appear to be reflected in the stock price:
With COST ending the week near new highs, it looks like the stock might be ready for another leg up. So personally, I’m planning to pick up shares early next week with a stop about $18.30 below my entry price.
This should allow me to catch any further momentum, while moving to the sidelines if we see a lower low below the recent consolidation zone.
Importantly for my style, COST isn’t just in a technical uptrend. But the fundamental trends underlying the business are really impressive too. Here are the financials from Morningstar:
I like to look at these year-over-year changes to get a sense for the long-term sustainability of a company’s economic advantage. In the case of Costco, it’s hard to argue with these trends.
After all, revenue has ticked higher year-after-year, just like clockwork. And with slow but steady improvement in margins, that means earnings and cash flow have also followed suit.
Plus, with a steady share count over the years existing owners haven’t been diluted. So to degree these trends continue, the stock price should keep moving in the right direction (… at least if you ask me!)
With earnings not scheduled until the beginning of March, I’m hoping COST can keep trending until then – and hopefully beyond!
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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