Free Trend Following Trade Ideas For October 2019 (Part 4):
I had a lot of great feedback last week, with the increased focus on fundamentals. So I’m going to keep that trend going and focus on fewer stocks, but continue to dive a little bit deeper. This way, you can see what the intelligent part of my trend-following approach is all about.
Okay, now let’s dive into the market! First up, I want to take a look at the bigger picture of price action. And then I’ll show you a stock idea that’s showing both strong fundamental and technical trends.
Alright, as promised let’s start with some index ETF charts to get oriented with what’s going around on the major asset classes. By the way, I’m also working on a new project for investors who want to combine trading + fundamental analysis. If that sounds like you, I’m curious for your feedback. Click here.
October 2019 – End of Month Market Update:
It’s the last full trading week in October. And perhaps surprisingly, the first month of Q4 is off to a good start. But you don’t have to take my word for it.
Take a look at the SPY ETF to see how we’re within striking distance of all-time highs.
Now looking ahead, I think it’ll be very interesting to see whether SPY runs into some resistance here. Or if it can keep charging ahead and finally get back to blue sky territory. Which way am I leaning? Well…
One reason I’m a little bit optimistic is because of the price action in stocks globally. Last week, I shared a chart of ACWI showing a long weekly trading channel. And the updated chart this week looks about as good as you could expect with a breakout from this long sideways range
Now naturally, ACWI could retrace. Or this could be a fake breakout altogether. But you’ve got to start somewhere. And this little bump is a good first step.
I’m also encouraged because bonds have been holding their ground. Of course nothing is guaranteed, but I think a slow decline from here could mark a rotation back into the stock market. I’ll be watching TLT closely next week for clues:
Finally, the other big picture consideration is earnings season. And the good news is, FactSet reports things are going pretty well so far, with 80% of S&P-500 companies reporting earnings beats and 64% of companies beating on the top line.
There’s still about 60% of S&P-500 companies that need to report. But so far so good and many of the reactions have been favourable. In fact, earnings are actually a catalyst for this weekend’s trade idea…
Oct 2019 Month-End Trade Idea:
One of the tenets of trend following is: look for the strongest stocks. At the risk of overpaying, you can hitch your ride to a wagon that’s going to keep going. And one of the strongest looking stocks right now is Microsoft (MSFT).
Here’s the weekly chart so you can see the major trend. I’d be willing to buy this breakout with a $16 trailing stop…
Now yes, MSFT moved a lot last week. But it was in the context of a strong earnings report and a huge JEDI-cloud contract win announced Friday after the bell, all of which comes a multi-month sideways consolidation period.
You can see this latter dynamic a little more clearly on the daily chart, here:
This stock has been coiling for some time, and based on the confluence of fundamental and technical factors, I’m hoping this can keep running for another leg higher as the underlying business performs.
That said, if you’re nervous buying up here, you could also try and wait for a pullback (although there’s no guarantee that will come!)
Okay, now the great thing about MSFT right now is we don’t have to stop with these strong technicals. Because there are also some great fundamental trends that are worth highlighting!
As you’re about to see, MSFT truly has many hallmarks of a great business.
Fundamental Trend Following with MSFT:
I’ve always said traders can pay attention to fundamentals. And today with MSFT I want to show you why. My thinking here is that over time, if you focus on trading better quality stocks, the odds will be further in your favour.
And in my personal opinion, MSFT is one of the highest quality companies out there. You can see the traits of this for yourself by looking at the longer-term financial trends from Morningstar…
There are a couple things I want to point out here; because as you probably know, it’s not easy to run a fantastic business that grows profitably like clockwork every year. But that seems to be what the good folks at MSFT have done:
- Revenue has nearly doubled over the last 7 years. And that growth hasn’t been too bumpy. It’s moved higher most years, with a recent acceleration (likely driven by the Azure Cloud and subscription-based Office products).
- At the same time, margins have always been quite high and appear to have bottomed in 2016. So the accelerating revenue growth should fall increasingly to the bottom line.
- One other thing I look for is whether these benefits accrue to shareholders. And with the share count reducing by 750M over the last 7 years, this growth should continue to result in growing EPS (as current owners aren’t being diluted).
These traits are no small feat, and when combined with the recent earnings beat and strong growth forecast it looks like MSFT can keep firing on all cylinders.
The other checks I usually do – for things like return on equity and debt/equity – also look good (as you’d expect with such a quality business). Here are the key ratios, again from Morningstar:
And when you put all these pieces together, I’m comfortable owning shares of this company. Plus, MSFT even kicks out a dividend. I’m sorry if this idea is a little bit “too obvious” – but sometimes the best things are hiding in plain sight!
I hope you also see how you can combine a position-trading approach with an investing mindset. For example you can always have a core holding of a great business or ETF, and then use technical trend following tactics to manage your exposure levels in changing market conditions.
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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This Blueprint shares the EXACT step-by-step process I use to find and trade stock picks each week (just like the ones above). So…
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