Upticks – January 2023

Happy New Year to All!

Update

2023 has gotten underway with a far more robust rally than many were expecting to kick off the new year.  Some of this has been difficult to see given Technology’s underperformance and its weighting in the major indices.  Sectors like Consumer Discretionary, Communication Services, Real Estate and Materials are all up more than 5% to start the year, but yet US remains a relative laggard to Europe and most of Asia.

S&P and NASDAQ remain in technical downtrends from this time last year, cycles still show the chance for consolidation, and Technology continues to lag other sectors.  Yet a few major positives have certainly cropped up with such broad-based leadership from other sectors.  Additionally, the prospects of ongoing negative earnings revisions seem to have kept the most fundamentally oriented on the sidelines, despite some evidence of inflation cooling.  Finally, the 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.

Overall, I expect 2023 to be a much better year than last year.  I’ll hold off on discussing sector favorites and targets until my Annual Outlook webinar which takes place on 1/24/23.  Yet, it’s time to adjust the portfolio yet again and make some additions as well as a couple of subtractions.  As always, I preface those comments with a thorough review of the major sectors, shown in Equal-weighted terms vs. the Equal-weighted S&P 500.  I look forward to our journey in 2023, and thank you, as always, for your continued support and interest in my work.

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)

• Valero Energy Corp. ($VLO – $137.61)

It still looks right to have some heavy exposure within Energy, and VLO fits the bill given its recent strength and technical improvement in recent weeks.   Daily charts showing the last few years of technical structure show this as a large triangle pattern with VLO pushing up to test resistance highs directly over $140.  While this stock will need to exceed November peaks near $142 before the larger rally starts to get underway, this looks like one of the more attractive intermediate-term risk/reward formations within Energy at the present.  Pullbacks should find support near $127-$130 which should translate into attractive risk/reward opportunities in the weeks to come.

Additions (Laggards)

• Wynn Resorts, Limited ($WYNN – $98.01)

WYNN, shown above, has proven to be the best performing stock in all of Consumer Discretionary over the last three months, having risen more than 60%.  As weekly charts show, WYNN bottomed out near $50 last June and is now approaching 100, a doubling in price.  However, momentum has now gotten overbought, and prices are nearing a very critical long-term downtrend which likely stops this rally into end of week.

While buying dips might seem proper given such a huge upshift in momentum of late, this looks to be a poor area to consider WYNN, and many looking at daily charts would be better served to examine how this appears on a weekly basis with prices moving right into trendline resistance.

Given that many of the casinos have surged given China’s reopening, I expect that many are due to backtrack now, as evidence of exhaustion is apparent on many different timeframes of China’s Large-Cap ETF, $FXI. 

I expect WYNN to be a substantial laggard, and should weaken to support near $81, representing the 38.2% Fibonacci retracement of its rally off October lows.  However, additional weakness might happen into $70-$75.

Deletions

• O’Reilly Automotive ($ORLY)

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, $HES, and new addition: VLO.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$MPC	121.8	105	129
$LNG	149.9	147	182,199
$OXY	64.7	62.7	79, 88
$HES	151.7	130	155, 162
$VLO	137.5	114	159,176

Sector Commentary

Healthcare’s breakout attempts look to have failed yet again, as the ratio of Equal-weighted Healthcare to SPX failed to follow-through after briefly exceeding recent consolidation resistance before pulling back into end of year.  Similar as prior months, Pharmaceutical and Biotech are still preferred over Healthcare Services and Medical Devices despite some minor underperformance in recent weeks.  Both Pharmaceutical stocks and Biotech have been steady outperformers within Healthcare since early last year, and Biotech is expected to be a possible leader in performance for Healthcare in 2023.  Overall, this sector remains favorable for outperformance and evidence of range-breakouts in $IBB along with $RYH vs. SPX would make this group even more appealing. Favorite longs include VRTX, REGN, UNH, HUM, and $BMY

Preferred Technical Stocks

Ticker	Price*	Support	Resistance
$VRTX	312	287	350, 409
$REGN	728.1	702	791, 860
$UNH	485.1	482	589, 627, 651
$HUM	490.5	470	573, 601
$BMY	72.3	74.50	91, 101

Sector Commentary

The outperformance in Industrials has stalled out briefly in recent weeks following a very strong year of outperformance in Industrials to test an area of resistance vs. SPX which has held since 2020.  While a bounce in US Dollar looks possible in 1H 2023 which might temporarily result in further stalling, a larger rolling over in the Dollar likely aids Industrials and this group is expected to outperform in 2023.  Keeping a close eye on this sector remains important also, as exceeding 2020 peaks vs SPX would allow for intermediate-term outperformance in Industrials vs. SPX. Favorite stocks include: NOC and PWR

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$NOC	455.6	460	566, 601
$PWR	148.3	136	155

Sector Commentary

Materials has begun to show some strong outperformance lately and is the best performing sector of any of the major 11 groups with returns of greater than 18% in the last three months.  Given the strong uptick in Metals performance lately, it’s likely that this strong start to January likely continues for 1H 2023, which should make this sector also one to overweight for the year.  Daily relative charts of Equal-weighted Materials vs. the SPX shows this ratio breaking out of a reverse Head and Shoulders pattern from Spring of 2022. . This bodes well for further outperformance in Materials.  I’ll look at buying dips in Materials names on weakness in the months ahead, but at present, ALB looks like a great risk/reward.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$ALB	243.1	250	334, 398

Sector Commentary

Consumer Discretionary has turned in the best performance of any of the 11 major select SPDR ETF’s thus far in the early weeks of 2023, higher by nearly 9% ($XLY). However, as can be seen above, a bit more strength is necessary before thinking this sector is beginning meaningful outperformance.  Overall, this sector has largely gained ground in recent months given the outperformance in Casino names and Retail, both groups which could be susceptible to mean reversion back lower in the months to come. For now, Consumer Discretionary is Neutral and selectivity is a must. Favorite longs include HD, CASY, DG and LEN.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$HD	327.5	265	333, 360
$CASY	230	224	243, 253, 289
$DG	232	233	264, 310
$LEN	98.8	69.9	98, 114

Sector Commentary

Financials relative strength has faltered a bit since October as Treasury yields began to turn sharply lower. Sub-sector strength has come largely from Investment banks/brokers while Regional banks have underperformed on the recent pullback in Yields. It’s expected that Financials might show further underperformance if/when Yields continue their recent decline, which looks very possible through the end of Q1. Overall, until/unless Treasury yields begin to strengthen back to highs, which could happen during April-September timeframe, Financials should likely underperform, and Regional banks won’t show nearly the same kind of strength as has been seen in recent years. Favored stocks: PGR.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$PGR	130.7	120	132, 143

Sector Commentary

At present, Consumer Staples has weakened relatively coinciding with the bounce from late December. Relative charts of $RHS vs. $RSP have reached the bottom of its recent eight-month range, and could stabilize and turn higher in the weeks ahead. Overall, technical trends remain neutral in Staples since last Spring and since 2016 with no real change of trend. Any move back up above December 2022 peaks would make this more attractive. Bottom line, this triangle pattern will need to be broken in either direction to have any real conviction on the bigger trend. 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	102.2	85	113, 124
$HSY	226.2	217	241, 251
$PEP	176.1	161	187, 202

Sector Commentary

Utilities look to be at trendline support following their ongoing pullback from last Fall’s highs. While a bounce looks likely in this group on both an absolute and relative basis, enough damage has occurred in momentum in recent months to suggest Utilities should not be the preferred sector to own for any length of time, even among Defensive sectors, as it 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	83.4	79.3	100, 105
$NEE	85.7	69.8	90, 102
$SRE	161.8	136	166, 179

Sector Commentary

Despite the bounce in Communications Services over the last month, the downtrend and underperformance in this group over the past three and six-month periods remains very much intact. Communication Services has trended lower in Equal-weighted terms relatively vs SPX for the last 20 months.  This makes recent sharp gains of 10%+ in names like META, MTCH, CHTR, and DIS likely something to sell into given the ongoing downtrend. Technically speaking, there will need to be evidence of this sector exceeding downtrends vs. SPX, before it’s considered to be a sector which might offer some outperformance. At present, Communication Services remains a technical underweight.  

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$TMUS	147	142	166, 187

Sector Commentary

Technology remains a laggard despite rates having pulled back sharply in recent months.  Most Large-Cap Technology names like AAPL, MSFT, GOOGL which make up substantial parts of many US benchmark indices and ETF’s, have not signaled sufficient evidence of having broken out above ongoing downtrends.  Furthermore, yields now look to be nearing support and might bounce in the weeks to come.  Given the positive correlation of Treasuries and Equities over the past year, this might adversely affect Technology and Equity indices into late January.  At present, until this sector can show more proof of breaking out and show further strength off the lows, it’s right to be selective and not be too bullish on front-running any breakout. Key stocks to favor include: AAPL, ADP, and ON.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$AAPL	135.9	129	157, 176
$ADP	236.8	218	261, 290
$ON	65.9	55	77, 81

Sector Commentary

REITS have attempted some stabilization following the Sector’s pullback to test January 2021 in relative terms vs. SPX. It’s notable that this sector fell sharply despite rates pulling back from late last year, but REITS largely proved to sell off as the “safety trade” began to lag from last Summer. Given that the stock market is likely to have a much better year, and rates could still manage to push higher into this Summer, it’s difficult to overweight REITS without proof of relative breakouts in Equal-weighted REITS vs. Equal-weighted S&P 500. Preferred REITS to own include: PSA, EXR, and IRM.

Technically preferred Stocks

Ticker	Price*	Support	Resistance
$PSA	291.6	270	313, 353
$EXR	153.1	154	193, 215
$IRM	52.3	46	56