Upticks – February 2023

Note: This Upticks report will be in replace of my Daily Technical Strategy piece today (2/22/2023).

Update

US Equity markets continue to be caught in a tug-of-war between bulls and bears, with market participants largely still confused as to why economic data and earnings are not having as strong of a pull on market prices as many might expect. The bears continue to wrestling with downward earnings revisions and the ongoing uncertainty of the FOMC’s endgame for interest rate hikes.  Meanwhile the Bulls seem to champion a quicker pullback in inflation and a more resilient economy which might be able to withstand further rate hikes and usher in growth in the months to come.

Technically speaking of course, most of the data continues to support a more enthusiastic stance for risk assets, largely centered on recent momentum and breadth expansion, coupled with bearish sentiment and bullish market cycles for US Equities.  Sectors like Technology have staged a sharp rebound, and key index constituents like MSFT, GOOGL and AAPL have all exceeded their respective downtrends. As of early February, the percentage of SPX issues above their respective 200-day moving averages had surpassed 70%, the highest level in more than a year.

Meanwhile, as previously discussed, first-half seasonality in pre-election years tends to be one of the best periods of the four-year Presidential cycle, which might make near-term cyclical weakness prove short-lived.  This bullish cyclicality has largely proved to be opposite to Wall Street Consensus, which came into 2023 expecting a weaker first half followed by a comeback in the back half of the year.

February has indeed proven tricky thus far, and prices have run counter to normal pre-election year seasonality for the month.  Yet a few bullish points are worth mentioning which largely reinforce the idea that a positive stance this year should be correct.   First, uptrends from last October’s lows remain intact, and despite some minor “backing and filling” no real technical damage has occurred.

Furthermore, defensive sectors have shown persistent underperformance.  Even counting the weakness of the past few weeks, sectors like Consumer Discretionary, Technology and Communication Services have outperformed sectors like Utilities and Consumer Staples.

Finally, most of the world continues to show very constructive signs of recovery from last year’s bear market,and several countries like France and the UK have seen their respective benchmarks rise back to new all-time high territory.  The US has lagged in this regard given big-cap Technology’s weakness in recent months.  However, the US is thought to offer some upcoming mean reversion to other international indices given the success of Technology having begun to strengthen.

One of the more important pieces of the puzzle concerns market sentiment, and on this point, I see short-term sentiment having diverged a bit from longer-term sentiment.  Specifically, call option trading has recently hit all-time highs in volume thanks to recent interest in Zero-day-to-expiration options (DTE-0).  Furthermore, popular gauges of sentiment like AAII and Fear and Greed recently switched back to bullish/greedy after months of having been negative.  However, this comes amidst an intermediate-term trend of very high cash balances in investors’ portfolios.  Moreover, recent Bank of America Portfolio Manager surveys from January showed Portfolio manager allocations to US equities having plummeted to the lowest levels in nearly two decades.  Overall, my thoughts are that short-term weakness in Equities in recent weeks should go a long way towards helping to reign in this short-term bullish sentiment and provide buying opportunities for investors who are focused more on the intermediate-term.

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

Additions (Upticks)

• Microsoft. ($MSFT – $251.51)

Microsoft looks right to have exposure to following its successful breakout of the long-term downtrend followed by its pullback over the last couple weeks.  Its rally into late January came very close to testing its 50% retracement of the prior decline, but fell short given prices finding resistance at the weekly Ichimoku cloud.  Now recent weakness has brought prices right back to test the area of the breakout, which creates an attractive technical risk reward.  Upside looks likely up to retest $276.76 and over should drive a rally up to $298, or the 61.8% Fibonacci retracement of the prior decline.  Momentum has begun to slope higher on a weekly basis, and makes a compelling case that MSFT likely has begun to bottom out.   Ideal support to buy dips lies at $242-$249.  However, any move back over $260 likely means this rally is getting started again, and no further pullback might be necessary.  Overall, MSFT looks to outperform among large-cap Technology, and looks technically appealing here.

• Amgen. ($AMGN – $236.16)

Amgen looks attractive following its recent 20% decline over the last three months as part of its larger bullish pattern.  While this downtrend remains ongoing and has not yet stabilized, AMGN looks attractive given that momentum has reached oversold levels while prices have pulled back to test an uptrend connecting rising lows from late 2021.  Support on this recent drawdown could materialize at current levels with a maximum selloff down to test September lows just above $223.

• Boston Scientific ($BSX – $46.61)

Boston Scientific looks quite appealing following the lengthy intermediate-term breakout which happened back in late November 2022.  The stock had been basing since early 2020, so the consolidation had spanned nearly three years before being exceeded three months ago.  Volume has been supportive of this rally and expanded initially in October and then again back in late January when this moved over $48.  Now a two-week consolidation should provide an appealing area to buy dips for those looking after successfully helping to lessen overbought conditions.  Upside targets lie near $58 while support on pullbacks is found at $43.50

Other Additions (Not Written Up)

• Eli Lilly ($LLY – $329.07)
• Merck ($MRK – $109.16)

Other Comments

Tesla ($TSLA – $200.86)

I’m choosing to keep TSLA as a laggard selection, despite the stock’s massive comeback in the last couple months.  While initial comments did suggest a move down to near $100 was possible, there wasn’t sufficient technical evidence at the time to suggest it was right to remove TSLA as a laggard, expecting any kind of meaningful rally.   Now TSLA has begun to stall out in the last couple weeks right near the area of the former breakdown at $205-$215, an area that I feel is technically significant given that it’s lined up with the giant area of neckline support (which should now prove to be resistance on this retest)  My cycle composite shows TSLA peaking and declining into the month of May.  However, it’s still difficult to expect TSLA pulls back right away, and it’s necessary to see the stock get back under $187.61 on a weekly close before any larger pullback is thought to be getting underway.  Bottom line, I view a 100% rally since January as part of a larger bearish pattern to make the stock unattractive at current levels.  However, I will remove TSLA if this exceeds $225, as this would be a signal that a rally up to $259 might be possible before pulling back.  At present, this current area at $200 does not seem right to expect meaningful upside, and therefore I’ll continue to hold this stock as a laggard which I expect possible underperformance in the weeks/months ahead.

Revisions to Support and Resistance on existing names

• Lennar ($LEN) – raising resistance to $117
• Casey’s General Store ($CASY) – Choosing to hold despite a recent break of short-term support as longer-term support lies at $197
• Monster Beverages (MNST) – Resistance will be at $114, then $124.  MNST had hit first level, but expect ongoing rally for this stock.
• Hess (HES) – Moving resistance up to $120
• Marathon Petroleum (MPC) – Resistance moved to $140
• Bristol Myers (BMY – Lowering support to $65.95
• ON Semiconductor (ON) – Support moved to $60. Resistance level now $100

Deletions

• Home Depot ($HD – $295.50)
• Pepsi Co ($PEP – $176.12)

Deletions (Laggards)

• Norwegian Cruise Line Hldgs (NCLH-$16.84)

• Ollie’s Bargain Outlet Holdings ($OLLI-$58.69)

• Wynn Resorts ($WYNN- $107.67)

Sector Summary

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

Tickers

Sector Outlook

Sector Commentary

Energy is looking more attractive from a counter-trend perspective following its recent weakness to test areas of intermediate-term trendline support. Over the last three months, Energy has been the weakest of any of the major S&P SPDR ETF’s, and both XLE and RYE show absolute declines of 6.00-8.65%.  However, both Elliott-wave counts along with bullish seasonality on WTI Crude argue for higher prices between February into May 2023.  Thus, while Energy has underperformed along with other defensive groups lately, it should be nearing a bottom, and it’s right to own Energy and buy dips, particularly in Refining, Integrated and Oil Services names.  Once WTI Crude exceeds $85, one can seek out the more closely correlated Exploration and Production names.  Overall, I remain bullish on Energy for 2023, and recent consolidation should provide a good technical entry for those looking to buy dips in technically attractive sectors.  Key Energy names to focus on: MPC, LNG OXY, and $HES, and new long in XOM.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$MPC	109	105	140
$LNG	163	147	182,199
$OXY	64	62.7	79, 88
$HES	133	120	155, 162
$VLO	131	114	159,176

Sector Commentary

Healthcare’s weakness over the last two months is thought to represent an attractive opportunity to overweight this sector after recent underperformance.  This sector fared better than many other sectors which are thought to be defensive in nature, and Equal-weighted Healthcare fared far better than $XLV, with gains of -0.96%, vs. a loss of -2.54% on a rolling one-month basis.  Similar to last month, the ratio of Equal-weighted Healthcare to Equal-weighted SPX remains largely in “No-Man’s Land”, and still in consolidation following its failed breakout back in December 2022.  When diving into Sub-sector performance, there’s been some meaningful recovery in both Healthcare Services and also Medical Devices in recent weeks. Both sub-industry groups have outperformed other areas like Pharmaceuticals, while the Biotech outperformance is also a work in progress.  Given the larger intermediate-term breakouts in both Pharmaceutical names and also Biotechnology, these latter two remain preferred over Devices, or Healthcare Services.  Overall, a breakout above December 2022 highs will make Healthcare more appealing when viewing relative charts of $RYH vs. SPX.  Favorite longs include $VRTX, $REGN, $UNH, $HUM, $LLY, $MRK, $AMGN, $BSX, and $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
$LLY	329	296	375, 395
$MRK	110	86	120, 135
$AMGN	236	223	259, 296
$BSX	47	43.5	58
$BMY	80	65.95	91, 101

Sector Commentary

Similar to January, Industrials has largely been in consolidation mode on a relative basis to the SPX, following a very strong year of outperformance.  However, this might very well be changing, as the rolling 30-day period shows a definite uptick in relative strength, and Equal-weighted Industrials has proven to be the best performing of any of the 11 major sectors on an Equal-weighted basis, with returns of +2.44% over the last month.  Relative charts of Industrials vs the market remains technically attractive, and strengthening has helped this sector move to within striking distance of a multi-month breakout. Given the US Dollar’s ongoing decline, it’s thought that Industrials should prove to be an outperformer for 2023.  Overall, the ability to exceed this larger area of consolidation resistance would allow for intermediate-term outperformance in Industrials vs. the broader market.  Favorite stocks include: $NOC and $PWR

Technically preferred Stocks

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

Sector Commentary

Technology has snapped back with a vengeance after bottoming in late December.  Relative charts of Equal-weighted Technology by Invesco ($RYT) vs Equal-weighted SPX ($RSP) have officially broken out of the downtrend from January 2022, which is thought to be a constructive development.  This sector bounced sharply late last year as yields started to pullback sharply.  However, the subsequent 50 basis point (b.p.) spike in rates didn’t really have much effect.  Now after a rally back to December 2022 peaks in US 10-year yields and 10-year German Bund yields, it looks very likely that rates roll back over and decline over the next 4-6 weeks into April.  Overall, the degree of comeback in recent months makes this sector attractive as an overweight, and should drive SPX and QQQ higher given their Technology weightings. Key stocks to favor include: $AAPL, $ADP, $ON and $MSFT.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$AAPL	143	129	157, 176
$ADP	260	218	261, 290
$ON	72	60	100
$MSFT	251	242	277, 298

Sector Commentary

Materials has stalled out after an early productive start for 2023, and the bounce in interest rates and the US Dollar this past month have adversely affected Materials performance.  Metals and Mining got an early start with outperformance, and Chemicals played catch-up before showing some minor consolidation following its recent breakout.   Despite recent rallies in both yields and US Dollar, I expect both to turn back lower in the next couple months, which could be helpful in driving a commodities rally, and subsequently 1^st Half 2023 outperformance for Materials.  At present, I expect more 1^st Half than 2^nd half outperformance from Materials.  Overall, near-term weakness likely should present actionable opportunities to give this sector consideration for strength in the months to come.

Technically preferred Stocks

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

Sector Commentary

Equal-weight- The short-term breakout in Consumer Discretionary vs. the Equal-weighted S&P 500 likely drives some near-term outperformance in the short run, as this represents a bullish breakout of the consolidation that had been in place for Discretionary relative to SPX since last Summer.  Overall, the overbought conditions in many Retail and Leisure names hasn’t yet resulted in this sector stalling out and turning back lower.  While near-term overbought conditions could eventually result in Discretionary consolidating some of its recent gains, this appears early at the present time. Favorite longs include: $CASY, $DG and $LEN.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$CASY	249	197	243, 253, 289
$DG	249	233	264, 310
$LEN	89	69.9	117

Sector Commentary

Financials relative strength largely remains mid-range vs SPX over the last year, despite several attempts at unsuccessfully moving both higher and lower in recent months.  Treasury yields have bounced a bit over the last few weeks; However Financials have largely traded sideways relative to SPX.  Overall, relative strength in this sector in the last couple months has shifted out of Regional banks despite the uptick in rates over the last month.  Furthermore, Investment banks and Insurance have both made headway, despite the Insurance trade being more of a defensive tilt.  Overall, Treasury yields likely are on the verge of turning back lower, which likely could cause some further underperformance in Regional banks and might result in the Financials space lagging.  However, until Financials break relative support vs the SPX, the near-term trend is more neutral, not bullish nor bearish.  Favored stocks: $PGR.

Technically preferred Stocks

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

Sector Commentary

At present, the snapback in Consumer Staples vs. the broader market over the last two weeks has proven constructive for this sector, yet still doesn’t make Staples a group to favor in the short run.  Despite the minor bounce in Consumer Staples in the last week, this sector still showed a breakdown last month relatively speaking to SPX to the lowest level since last Spring.  Overall, 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.  Moreover, I don’t think that changes anytime soon. Once SPX regains 4200 on the upside, Consumer Staples likely will begin to decline relatively in 2023. A Neutral view technically looks correct, and selectivity is important. Favorite stocks include $MNST, and $HSY

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$MNST	102	85	114, 241
$HSY	241	217	241, 251

Sector Commentary

Utilities continues to trade quite weak given the recent uptick in interest rates along with the positive trend in US Equity benchmark indices since last October.  The technical damage caused when Utilities broke its 10-month relative uptrend vs. Equal-weighted S&P 500 has not been recouped, so despite a minor pullback in US Equities in February, Utilities still don’t seem like an attractive technical group to overweight.  Bottom line, enough damage occurred on the recent breakdown 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	179

Sector Commentary

The mean reversion bounce in last year’s laggard Communications Services sector is still ongoing.  This sector has turned in the second best performance of any major sector for 2023, and through 2/22/23 is higher by more than 10%.  Yet, on a 12-month basis, it remains the worst performing of any of the 11 major sectors.  As shown above, prices have pushed higher to test meaningful downtrend line resistance.  Until this can be exceeded, it’s thought that Comm. Svcs has made a short-term rally only as part of a larger downtrend.  Thus, this sector will remain a technical underweight given the short-term overbought conditions as part of the intermediate-term downtrend. Near-term stocks like $TMUS are ones to overweight

Technically preferred Stocks

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

Sector Commentary

REITS have stabilized in recent months after the sharp drawdown that gripped this sector from November into December of last year.  Relative charts of Equal-weighted REIT ETFs from Invesco ($EWRE) vs Equal-weighted S&P 500 ($RSP) are still hovering in range-bound consolidation, and until this sector can strengthen sufficiently to break the downtrend from Spring 2022, it’s still right to consider REITS an underweight.  While a rolling over in Treasury yields is anticipated, REITS look to be unattractive as a sector to overweight at this time 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