Upticks – December 2022

Happy Holidays to All !

Update

2022 has been a challenging year for many investors with most having clearly held onto Technology stocks too long before finally abandoning in May just as many were reaching oversold levels and starting to stabilize.  The subsequent bottoming out in June/July wasn’t something many participated in.. Rather, institutions largely used the rally to sell into, flattening out and instituting short exposure.

While the drawdown from August helped to embolden many that they’d made the right decision, the bottoming out in October at levels just below June was also something that occurred at a time when Earnings revisions were just starting to be taken down.

Those who use earnings as a means for how to follow the stock market have learned a valuable lesson this year.  Despite the Federal Reserve pressing rates higher and economic conditions starting to deteriorate, it was the markets realization that inflation was starting to rollover that proved to be a more accurate reason as to why to be long stocks from October into December. Furthermore, the start of rates turning down sharply provided another important lesson that that lesson that the bond market simply had begun to lose faith in Powell’s hawkishness

Technically speaking, I attempted to call a tactical bottom back in early October as evidence of DeMark exhaustion lined up with intermediate-term cycles bottoming just as fear levels were pressing to extremes.  While markets truly didn’t show sufficient capitulation to satisfy most investors that a meaningful bottom might be in place, these are often tough to come by.

Fast forward to December after a 10%+ lift in US Equities while Europe and China have risen far more robustly off the lows, it looks time to give the equity market another serious, hard look.  SPX, along with NASDAQ, DJIA and many European and Asian markets, now look to be nearing key make-or-break resistance. The positives and negatives as December gets underway revolve around the following issues.

Positives

• Momentum and trends remain positive short-term, and not overbought
  SPX higher by nearly 500 points since 10/13 intra-day lows. 

• Breadth expansion has been robust since October with >50% of SPX issues above their respective 200-day moving average (m.a.)
• Broad sector leadership has proven impressive, with Equal-weighted Materials, Industrials, Consumer Discretionary, REITS, Energy and Materials all up more than 12.8% in the rolling 1-month period, outperforming SPX
• Technology has rapidly caught up with the Cyclicals with its outperformance in the last month, and of the Equal-weighted Sector ETF’s by Invesco, Tech has outperformed all other major sector ETF’s with a 16.20% gain in the rolling one-month period as of 11/16/22.

• Cycle for 2022 has closely replicated the 60-year cycle from 1962 thus far, bottoming in June and October before rallying sharply into end of year. The cycle composite for 2023 looks much better;  However, weakness in early 2023 possible

• CFTC data shows Net Non-commercial S&P Futures positions still negative, and institutions appear to be still very much on the sidelines

Negatives

• Monthly momentum remains negative sloping, and most major indices remain within downtrends from last November/this past January’s peak. SPX along with Value Line’s Equal-weighted indices lie just under important resistance, while NASDAQ has lagged performance on the rally from October lows

• Despite its recent sharp rally, Technology is still trending down in absolute and relatively speaking vs. SPX.  Until Technology can improve (27% of SPX), this is bearish

• US Treasury Yields and US Dollar still look to rally back to highs in 2023.  This combination in 2022 proved to be a negative for Stocks, and correlation remains quite high for Treasuries vs. Equities 

• Elliott counts still show a good likelihood of a pullback to test and break October lows.

• No meaningful capitulation has occurred throughout 2022 to suggest a meaningful intermediate term market low similar to 2002/3 or 2008/9.  While TRIN readings and sentiment polls gave short-term reasons for optimism on a counter-trend basis, the VIX never showed sufficient backwardation.

• Weekly cycles show the potential to bottom out in Q2 of 2023, so while the near-term cycles show strength from late October into December, this might require a retest of lows into 2023.  In other words, short-term strength might be sellable on any material bounce.

Methodology

• Relative strength vs. sector and index
• At/near 26-week and/or 52-week highs
• Positive momentum and/or Upward sloping moving averages on multiple timeframes
• Lack of DeMark exhaustion on daily, weekly, monthly and/or in combination based on TD Sequential and/or TD Combo indicators
• DeMark “TD 13 countdown Buys” utilizing TD Sequential and/or TD Combo indicators at/near lows on multiple timeframes
• Elliott-wave theory
• Positive momentum divergences (at/near lows for buy candidates), Lack of deterioration within its sector and at/near upper quartile of its annual range
• Above-average bullish bases for lengthy timeframes which might precede technical breakouts
• Short-term downtrends within existing intermediate-term uptrends which provide attractive risk/reward opportunities
• Leading stocks within sectors poised to benefit from cyclical upturns

Additions

• Bristol-Myers Squibb ($BMY – 80.88)

BMY looks attractive to add to UPTICKS given its outstanding technical structure on both a short-term basis and also long-term basis.  November’s month-end close of $80.28 represented a new all-time monthly high close, which structurally puts this stock in a very bullish technical position.  This recent rally successfully exceeded the 2016 peak as well as the former highs from 1999, confirming a breakout from a nearly two-decade Head and Shoulders pattern.  Moreover, the short-term pattern shown above highlights a smaller Cup and Handle pattern which was exceeded last week on the push back above early November peaks.  Rallies look likely to near-term technical targets near $91, then $101, while support lies at November lows near $74.50.  It will take a break under this level to postpone this rally, which is not expected.

Deletions

• M&T Bank – $MTB
• General Mills – $GIS
• Netflix – $NFLX

Sector Summary

Sector	Ticker	Positioning
Energy	$XLE	Overweight
Healthcare	$XLV	Overweight
Industrials	$XLI	Overweight
Materials	$XLB	Overweight
Cons Discretionary	$XLY	Neutral
Financials	$XLF	Neutral
Staples	$XLP	Neutral
Utilities	$XLU	Neutral
Comm Services	$XLC	Underweight
Info Tech	$XLK	Underweight
Real Estate	$XLRE	Underweight

Tickers

Sector Outlook

Sector Commentary

The Energy sector’s outperformance has shown some mean reversion in recent weeks given WTI Crude’s continued fall, which has nearly given back most of 2022’s gains. However, Energy still has outperformed all other major ETF’s on a 3-month, 6 month and 12-month basis and relative weakness over the last month has not violated intermediate-term uptrend lines. Thus, at a time when cycles and Elliott-wave analysis suggests WTI Crude oil should be close to bottoming out, overweighting Energy makes sense for 2023. Key Energy names to focus on: MPC, LNG OXY, and $HES.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$MPC	109	105	129
$LNG	163	147	182,199
$OXY	64	62.7	79, 88
$HES	133	130	155, 162

Sector Commentary

Overweight – Healthcare’s outperformance has picked up a bit vs. Equal-weighted SPX but has not broken out to the same extent as was discussed lately given the lagging effects of SPX given large-Cap Technology.  Similar to last month, Pharmaceutical and Biotech still look to be outperformers over Healthcare Services and Medical Devices and should continue to do so. Biotechnology ETF $IBB still looks to be on the verge of a larger breakout, and this should be watched carefully in December heading into January.  This looks more appealing from a risk/reward perspective in the short run.  Favorite longs include VRTX, REGN, UNH, HUM, and new addition $BMY.

Preferred Technical Stocks

Ticker	Price*	Support	Resistance
$VRTX	321	287	350, 409
$REGN	765	702	791, 860
$UNH	548	482	589, 627, 651
$HUM	547	470	573, 601
$BMY	80	74.50	91, 101

Sector Commentary

The outperformance in Industrials has continued in recent weeks, and when viewing this sector vs. the Equal-weighted S&P, we see this relative chart has pushed higher to retest an area which looks very important, technically. It’s encouraging that Industrials has managed to strengthen this dramatically while the US Dollar still hasn’t shown sufficient evidence that a major peak is in place. Overall, this group remains an overweight and any breakout above multi-year relative highs vs. Equal-weighted SPX would likely represent the start of more intermediate-term outperformance. Favorite stocks include: NOC and PWR

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$NOC	541	460	566, 601
$PWR	150	136	155

Sector Commentary

Materials remains near the middle of the pack amongst S&P Sectors on a one-month basis, but this group clearly outperformed on a three-month basis as evidence of US Dollar weakness along with rates pulling back got underway. While the US Dollar has been seasonally weak traditionally in December, DXY looks to be near important support and likely begins to turn back up towards highs into 2023. I’ll look to revisit former UPTICKS longs like NEM and FCX next year, but if real rates start to strengthen, than this group likely will weaken into early 2023. My favorite Materials stock at present is ALB.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$ALB	256	250	334, 398

Sector Commentary

Overweight- Similar to Healthcare, Consumer Discretionary managed to successfully hold Spring 2022 lows on recent retest attempts. Subsequent strength retraced 38.2% of its prior drawdown, and RCD has exceeded the downtrend from late 2021 in relative terms to SPX. Yet, intermediate- term downtrends remain intact on RCD vs SPX making this a “Neutral” and a group that requires more strength to argue for overweight status. Nonetheless, Consumer Discretionary has successfully broken out relatively vs Staples and has been a better performer than many Defensive groups over the last month. Overall, this sector looks to have bounced given strength out of various casino and retail stocks (which look like risky bets now) while Homebuilding names have also thrived, and those remain one of the more attractive parts of this sector. For now, Consumer Discretionary is Neutral and selectivity is a must. Favorite longs include HD, ORLY, CASY, DG and LEN.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$HD	324	265	333, 360
$ORLY	836	800	862
$CASY	249	224	243, 253, 289
$DG	249	233	264, 310
$LEN	89	69.9	98, 114

Sector Commentary

Financials relative strength might continue a bit longer if/when Treasury yields start to turn back higher towards monthly highs, though I’m not counting on this outperformance continuing. As discussed last month, this sector’s relative gains stalled out right near prior highs, and technically speaking, yields likely begin a lengthier retreat next year. Overall, strength in this sector likely comes from defensive parts of this sector such as Insurance and Regional banks until interest rates start to turn down more forcibly, when the focus likely turns to Investment banks. Yet, it’s unlikely that Financials starts to show above-average relative strength. Favored stocks: PGR.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$PGR	131	120	132, 143

Sector Commentary

At present, Consumer Staples remain the most attractive of the defensive sectors, outside of Healthcare, and this group is clearly preferred over Utilities as well as REITS. The outperformance over the last three months along with Year-to-Date and also 12 months vs Equal-weight S&P 500 keeps this trend moving higher since 2021. Yet, the broader trend for Staples has been range-bound since 2016, and i don’t think that changes anytime soon. Once US markets start to show more evidence of bottoming, Staples likely will begin to decline relatively in 2023. A Neutral view technically looks correct, and selectivity is important.  Favorite stocks include MNST, HSY, and PEP.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$MNST	102	85	113, 124
$HSY	241	217	241, 251
$PEP	184	161	187, 202

Sector Commentary

Utilities snapped back sharply over the last month after some severe weakness on both an absolute and relative basis into October. The technical damage caused when Utilities broke its 10-month relative uptrend vs. Equal-weighted S&P 500 has not been recouped, so this minor bounce likely won’t persist meaningfully and could prove short-lived, particularly if/when Treasury yields start to turn back towards highs. At present, enough damage has occurred to suggest Utilities should not be the preferred sector to own, even among Defensive sectors, as looks like an underweight compared to Consumer Staples. Favorite Utilities to buy/own: CEG, NEE, and SRE.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$CEG	91	79.3	100, 105
$NEE	86	69.8	90, 102
$SRE	162	136	166, 179

Sector Commentary

Despite the bounce in Communications Services over the last month, the downtrend and underperformance in this group on a one-month, three-month, six-month and YTD basis remains very much intact. Communication Services has trended lower in Equal-weighted terms relatively vs SPX for the last 20 months.  As stated last month, until this sector can manage to turn higher in a manner that will exceed downtrends vs. SPX, this sector will remain a technical underweight.  Near-term stocks like TMUS are ones to overweight within this group, and I am removing NFLX given its strength over the last two months as this now seems like a sub-par risk/reward into early 2023.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$TMUS	144	142	166, 187

Sector Commentary

Technology’s bounce since mid-October has been insufficient to overweight this group into 2023 as it remains in a technical downtrend on both an absolute basis, and relatively speaking vs. the Equal-weighted S&P 500. While Technology bounced as interest rates turned lower in recent weeks, Treasury yields look to be nearing important support and could mount a rebound into late December. Given the recent positive correlation of Treasuries and Equities, a bounce in rates likely would negatively impact Technology between now and December expiration. At present, until this sector can show more proof of breaking out and showing further strength off the lows, it’s right to be selective and not be too bullish on this sector. Key stocks to favor include: AAPL, ADP, and ON.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$AAPL	143	129	157, 176
$ADP	260	218	261, 290
$ON	72	55	77, 81

Sector Commentary

REITS have attempted a bounce over the last month after the relative breakdown to new yearly lows back in September 2022.  Unfortunately, Treasury yields likely are nearing support and should turn higher into 2023. It’s important for EWRE to exceed $32 to expect that REITS might show some better relative performance. Until a larger downturn in rates occurs, it’s tough to overweight this sector and it remains weaker than either Staples, or the Utilities. Preferred REITS to own include: PSA, EXR, and IRM.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$PSA	303	270	313, 353
$EXR	157	154	193, 215
$IRM	55	46	56