December 2019 Stock Market Update and Ideas (Part 2):
The first full trading week of December is behind us, and we’re only a stone’s throw from year end. It seems a distant memory now, but at this time in 2018, stocks were trending lower with seemingly no end in sight. This year, just the opposite is happening.
To summarize: Bulls remain firmly in control of the tape right now. And heading into 2020, the trend appears to be up. So in this weekend market update I’ll start by recapping the market environment overall, before focusing on an individual trend-following trade idea!
To get started, let’s review how the major indexes are holding up. Because even though we finished Friday near the highs, things got off to a rocky start.
December 2019 Stock Market Recap:
To set the stage with these weekly market updates, I always like to start with a chart of the SPY ETF to catch-up with what the S&P-500 is doing. I know this doesn’t represent the entire stock market; but with so much attention on US large caps, I think it’s a helpful benchmark to jump off from.
So for now, you can see the trend is higher. And after a rocky start to the week, dip buyers stepped in to close the index near it’s all-time highs following Friday’s strong jobs number.
This volatile dynamic is represented a little more vividly on the daily chart below:
All-in-all, this is the kind of price action is what uptrends are made of. Despite a mean pullback Monday and Tuesday morning, dip buyers showed up and were rewarded once again. As they say: the trend is your friend.
This is also the case with small cap stocks, where the Russell 2000 IWM ETF also kept chugging higher, after emerging from a long sideways consolidation period for most of this year:
If momentum continues, this could be a pocket of strength to keep watching as 2020 starts to unfold. Along the same lines…
I also like to check in with the All-Country World Index, because this gives a sense of what equities are doing globally. And right now, it looks like equities around the world are following the US playbook.
Here’s what I mean:
Just like SPY, ACWI started the week with a pullback before buyers stepped in and bid prices up back above resistance. Looking ahead into the end of the year, it’ll be interesting to see if bulls can hold onto these gains.
Personally, I think there’s a case to be made prices are a little extended in the short term, so some sideways consolidation wouldn’t be a bad thing as portfolio managers reshuffle their holdings into the end of the year.
Wednesday’s upcoming Fed policy announcement might also provide an excuse for short-term volatility, although no rate cuts or hikes are expected at this point.
Another part of the market I’m watching for clues are emerging markets. With trade war talk simmering in the background (and the latest December 15th deadline), it’s encouraging to see EEM holding up:
To be sure, EEM has lagged US stocks broadly. But there’s the possibility we’re seeing a higher low here and I’ll be watching closely into the end of the year to see how this segment of the market holds up.
Meanwhile, gold and treasury bonds have also been consolidating. To the degree stocks keep grinding higher and these other asset classes unwind a little bit, I feel cautiously optimistic heading into the end of the year.
With that backdrop in mind, now I want to zoom in one particular trade idea for the week ahead.
December 2019 Trend Following Trade Idea (Part 2):
With the market trending higher into the end of the year, one of the challenges is finding stocks that are showing momentum, without being too stretched above their longer-term moving averages.
One stock on my radar that seems to strike that balance well this week is Zebra Technologies (ZBRA). Below is the weekly chart where you can see ZBRA moving out of consolidation and starting to move to new highs.
For me, I’m happy to jump on a trend like this using a trailing stop based on the weekly ATR. In this case, I’d be placing my stop-loss order about $29 below entry price – giving this one a fair amount of wiggle room before jumping ship.
In addition to the technicals though, I also like the fundamentals of ZBRA. They provide enterprise-level data capture solutions that help companies operate more intelligently. By collecting and managing operational data more effectively, ZBRA can help businesses make more effective decisions, driving long-term profitability.
And from a quick look at the long-term financials, it appears ZBRA’s value proposition is well received by the market. Here’s the data from Morningstar, to give you an idea:
By looking at the longer-term operating trends (and not just single-year data points), you can start to get a sense of how consistently the company is performing. In this case, things look pretty good. In particular, operating cash flow has exploded by a factor of 10 since 2011. And at the same time, share count has remained quite small, which has likely helped the stock price coast higher.
To be fair, there are some bumpy earnings results in 2015-2016. But this appears to be the result of a big acquisition, and during that period revenue continued to coast higher, (which is a trend I always like to see!)
One potential challenge with buying high-quality businesses like this though are the valuations. The market will often make you pay up for quality. So let’s take a quick look at the valuation picture, again provided by Morningstar:
As expected, by most valuation metrics ZBRA is trading at a premium to the index. And knowing that high-flying expensive stocks can correct at any time, it’s important to have a plan for when to sell. Another approach is to put these kind of stocks on a watchlist and wait to buy the dip when they pull back more seriously.
In any case, understanding how the market values ZBRA, both directly and in relation to peer stocks, can help you make sense of the current price and align your expectations with what’s possible. I find by combining a quick fundamental check with a technical-based trading plan, can give you the best odds of potential success over the long term. ZBRA is but one example.
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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