Upticks – October 2022

Introduction

History shows Sir Isaac Newton not only to have excelled as a Mathematician and physicist, but also to be a skilled astronomer, alchemist, theologian, and author.

Many who have studied Newton’s history know that he published a book called “Opticks” back in 1704, expounding his corpuscular theory of light. He considered light to be made up of extremely subtle corpuscles, that ordinary matter was made of grosser corpuscles and speculated that through a kind of alchemical transmutation. As he puts it, “Are not gross Bodies and Light convertible into one another … and may not Bodies receive much of their Activity from the Particles of Light which enter their Composition?”  

Newton also constructed a primitive form of a frictional electrostatic generator using a glass globe. He was the first to show a diagram using a prism as a beam expander, and also the use of multiple-prism arrays.

Fast forward to October 2022, in homage to the great Isaac Newton, I am now unveiling my first technical Stock list, which on a subtle play on Newton’s Opticks, will be called “Upticks.”  This will be an intermediate-term technically derived stock list of some of my favorite liquid names within various sectors of the S&P 500 which I feel might offer attractive risk/reward opportunities at this stage of the market.

These ideas are largely based on stocks at/near 52-week highs that are showing excellent technical structure and little evidence of technical deterioration.   However, in some cases, I will elect to buy stocks that are extreme laggards, if my work shows that they’re primed to begin moving sharply off the lows following initial consolidation.  Note, stocks of this sort are far more likely to be tactical longs than buy-and-hold positions.  However, largely, this list comprises my thinking of the best stocks within most sectors of the S&P 500.

The duration for these selections will largely be 4-6 weeks and hopefully longer.  I have included technical targets as well as stops which are provided for the investor’s use for those who wish to utilize these.   My stops will be strictly adhered to, and any stock that drops under a stop on a daily close will be removed from the list.   Upside targets are guidelines only.  In some cases, these might prove to be premature to sell stocks that have reached these levels, and I shall address via email when stocks are getting close to targets and whether these targets could be adjusted and/or stops moved up, so as to protect profits.

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

Indexes

S&P 500 Index

Near-term bottoming process at work given a combination of excessively negative sentiment, compressed breadth while prices have pulled back to test lows which should be excellent near-term support.   The combination of bullish seasonality in October coinciding with cycles starting to turn higher should allow for a greater than normal bounce in October at a time when many least expect it.   Short-term momentum has turned bullish on early week index strength on above-average breadth while intermediate-term/monthly momentum remains negative.  Near-term resistance lies at 3950-80 and then 4200 which lines up with intermediate-term trendline resistance and is the 50% retracement of the entire high to low range from January.    Rallies expected in early to mid-October before a possible late October decline.

NASDAQ 100

Similar to SPX, NDX has also managed to hold June lows and is showing above-average signs of stabilization which should allow for rallies into October expiration.   Sentiment and breadth remain extremely compressed for most US indices.   This week’s bounce has allowed for short-term momentum to turn bullish on above-average breadth while intermediate-term/monthly momentum remains negative.  Near-term resistance lies at 11928, then 12800-50 which lines up with intermediate-term trendline resistance.  Rallies expected in early to mid-October before a possible late October decline.  NASDAQ is thought to have an above-average chance of outperformance given Treasury yields.

Sector Summary

Tickers

Sector Outlook

Sector Commentary

Overweight- Currently the most attractive sector for possible outperformance in Q4 given its relative breakout vs SPX to the highest level since late-2020.  Similar to a few other sectors, Healthcare has managed to hold Summer lows on recent absolute weakness and has turned up sharply in recent days.  While Pharmaceutical stocks outperformed most of 1H 2022, we’ve seen a resounding comeback by Sub-groups such as Biotech in the last two months.  The relative chart shows this to be an appealing group to position long and merits more long candidates than most other sectors. Favorite longs include VRTX, REGN, LLY, and HUM.

Outperform Stocks

Ticker	Price*	Stop	Target
$VRTX	302	276	350-409
$REGN	746	678	791-860
$LLY	332	296	358-390
$HUM	505	454	573-601

Sector Commentary

Overweight- Similar to Healthcare, 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, Discretionary has successfully broken out relatively vs Staples and has been a better performer than many Defensive groups over the last month. Overall a group that could become an overweight with strength back over August peaks; Yet for now, Discretionary is Neutral and selectivity is a must. Favorite longs include HD, ORLY, CASY, DG and LEN.

Outperform Stocks

Ticker	Price*	Stop	Target
$HD	290	265	359-372
$ORLY	732	680	793-862
$CASY	203	192	228-243
$DG	243	212	264-310
$LEN	80	62.50	98-114

Sector Commentary

This group looks to be slowly but surely trying to recover. Similar to Discretionary, this has also held Spring 2022 lows and has begun to stabilize. To its credit, relatively speaking, Technology has successfully now made two higher highs and higher lows since bottoming out this past Spring. However, Technology has been under pressure since the relative breakdown this past January from a near-three-year uptrend vs SPX. This will need to be recouped to have real faith in Tech being about to push back into a leadership position. Key stocks to favor include: AAPL, ADP, and ON.

Outperform Stocks

Ticker	Price*	Stop	Target
$AAPL	146	129	157-176
$ADP	239	225	261-290
$ON	70	61	77-81

Sector Commentary

The extent of Industrials bounce into August was considered quite positive for the sector, recouping more than 60% of what had been lost since January and successfully reclaiming the prior area of trendline support that had been broken. While similar to other sectors this did breakdown in late September, it held where most managed to find support, near prior year lows. Relatively speaking, this has been improving steadily in recent weeks, and is at the highest relative levels vs SPX since early 2021. Favorite stocks include: WM, NOC and PWR

Outperform Stocks

Ticker	Price*	Stop	Target
$WM	167	152	177-197
$NOC	484	440	515-558
$PWR	135	124	148-155

Sector Outlook

Sector Commentary

Similar to Industrials, this group’s relative strength to SPX has helped it reach the highest levels in more than six months, and has managed to trend sharply higher as rates have pushed up. While a rolling over in Treasury yields is eventually expected to get underway this month, this group remains trending higher on a relative basis to SPX and successfully held Spring lows on pullback attempts in recent weeks. Favored stocks include: PGR, PFG, MTB.

Outperform Stocks

Ticker	Price*	Stop	Target
$PGR	122	116	132-143
$PFG	79	70	89-96
$MTB	186	173	201-217

Sector Commentary

The giant early year rally has successfully consolidated, but yet not really shown too much technical weakness. We see absolute and relative uptrends at work, despite Crude having trended lower in recent months. Importantly, recent technical deterioration in the group has not violated recent uptrends to argue for Energy to begin any material underperformance. While Crude might require a final pullback to the low $70’s in the next few weeks, it’s thought that Energy as a group can weather just fine and continue to make headway higher. Key Energy names to focus on: MPC, LNG and OXY.

Outperfom Stocks

Ticker	Price*	Stop	Target
$MPC	108	89	118-129
$LNG	171	147	182-199
$OXY	68	57	79-88

Sector Commentary

Recent underperformance has brought this group down to meaningful intermediate-term trendline support going back since 2020. However, on relative charts, no real technical damage has occurred, and Utilities continues to trend upward in a pattern of higher highs and higher lows. Until this changes, Utilities will be an overweight and should show better relative strength. Favorite Utilities to buy/own: CEG, NEE, and SRE.

Outperform Stocks

Ticker	Price*	Stop	Target
$CEG	88	82	100-105
$NEE	82	75	90-102
$SRE	154	136	166-179

Sector Commentary

Huge drawdown in Staples since mid-August looks unusual given broader market weakness as this group has shown little to no real ability to provide relative strength as a defensive group. Relative charts vs SPX began to flatten out during May and remain sideways over the last six months, which adds to the Neutral view in the near-term. Given recent test of June lows and some stabilization by RHS, the Invesco Consumer Staples ETF, I expect some bounce on an absolute basis by Staples. However, one needs to watch for any evidence of support violation given that Equity markets are trying to carve out a bottom. A giant Head and Shoulders pattern could be in the making which would give way on any decline under mid-June lows. Selectivity is key in this sector. Favorite stocks include GIS, MNST and HSY.

Outperform Stocks

Ticker	Price*	Stop	Target
$GIS	78	74	85-90
$MNST	92	85	100-114
$HSY	225	210	238-251

Sector Commentary

Evidence of US Dollar and Yields rolling over has resulted in Materials turning sharply higher over the last week. Materials on an Equal and Cap weighted basis has been the second best performing major sector, and Metals stocks look appealing to push higher over the next couple months. This Sector maintains a bullish uptrend vs SPX since 2020, so much of its weakness from May of this year failed to break ongoing uptrends vs SPX and the broader breakout in Materials above long-term downtrend line resistance from 2011 looks important and more bullish than the minor five-month pullback appears bearish. Thus, Materials likely should kick into gear as both the US Dollar and Yields rollover. This likely happens between October and December of this year. My favorite Materials stocks are ALB, NEM and FCX, of which the latter two are strong counter-trend plays.

Outperform Stocks

Ticker	Price*	Stop	Target
$ALB	277	240	334-398
$NEM	44	39	51-57
$FCX	31	24.75	38.50-44

Sector Commentary

Minor Tuesday bounce might seem constructive on TWTR deal, but the entire space remains quite weak technically following an absolute breakdown under June lows. Bounces will need to help recoup downtrends on both an absolute and relative basis to have hope of Comm. Svcs starting to work better. Near-term stocks like GOOGL, NFLX, and TMUS are ones to overweight within this group

Outperform Stocks

Ticker	Price*	Stop	Target
$GOOGL	101	90	115-123
$NFLX	237	214	279-329
$TMUS	141	130	150-187

Sector Commentary

Big breakdown in REITS over the last month, despite this sector offering possible relative stability during a time of falling asset prices. While a bounce looks possible from oversold conditions, REIT ETFs like $EWRE will require a rally back over $32 to have hope of REITS starting to show some better absolute and relative performance. This group might start to gain some traction as Treasury yields start to fall by the wayside, though it’s likely that REITS take a backseat to more “risk-on” sectors like Technology between October-December. Preferred REITS to own include: PSA, EXR, and IRM.

Outperform Stocks

Ticker	Price*	Stop	Target
$PSA	294	270	320-355
$EXR	178	156	193-215
$IRM	47	43	50-56