In this post, I’ll focus on setups that I’m monitoring for both long and short positions. With a chart and short write-up, this is a quick way to scan and plan potential trades.
These ideas are the end result of my process to identify stocks offering the right combination of growth fundamentals along with a proper chart setup.
Stock Market Update
Following an easy trading environment coming off the April lows, the stock market’s leaders are being sold as a momentum unwind remains underway. That’s been most evident this week in precious metals and related mining stocks. Gold miners have been a leading sector this year, but are pulling back sharply as gold suffers it’s largest single-day percent decline in 12 years and the largest per ounce point drop in history. The rally during recent months was also characterized by low quality stocks in speculative sectors, many of which saw market valuations swell relative to sales and earnings. The chart below shows how heavily shorted stocks (which tends to include low quality companies) are soaring in recent months.
While the momentum unwind is taking down the stock market’s recent leaders, the conditions supporting a rally have hardly gone away. Financial conditions remain loose overall and are receiving another boost as the Federal Reserve is expected to cut interest rates at its two remaining meetings this year. That should be supportive for the economy and corporate earnings backdrop, which is necessary to drive the rally into next year. Although it’s still early in the reporting season, 85% of the companies in the S&P 500 are beating estimates which is the most in over four years (chart below).
The increase in volatility this month will present an opportunity for new chart bases to form and a fresh round of leaders to emerge on the next uptrend phase. It may be tempting to stop paying attention to the market when volatility picks up, but now is the time to focus on stocks showing the best relative strength that are trading in new basing patterns. With that in mind, I have chart updates to our watchlist.
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