Why Stocks Could Be Ready To Rally


It’s been a painful week for growth investors given significant declines in technology-oriented indexes and exchange traded funds. The NASDAQ 100 ETF (QQQ) fell over 11% from its intraday high this month to its intraday low this week, and returns were worse for software investors given the iShares Expanded Tech-Software Sector ETF (IGV) 12.5% drop from its month-to-date high to low point.

Source: Top Stocks for Tomorrow.

Many individual stocks fared worse. For example, high-flying Tesla (TSLA) lost over one-third of its value and Zoom (ZM), Wayfair (W), and Shopify (SHOP) declined by over twenty five percent.

Since many of the baskets and individual stocks that fell most were also those most extended to their 200-day moving average, it isn’t surprising they took the brunt of the sell-off.

Source: Top Stocks for Tomorrow.

However, our overbought indicator is still extended with over 50% of our 1,500 stock universe trading 5% or more above its 200-day moving average.

Historically, readings above 50% have preceded significant corrections, including the one we experienced this week and ideally, a correction would normalize this reading in the 20% to 40% range. Since we’re still north of 50%, it’s hard to argue all the pain has been felt when it comes to individual stocks.

The market itself could be finding its footing, though. Volatility can remain elevated for weeks following a 3% one-day decline in the S&P 500, but the market usually trades higher at some point within 30-days. In my experience, picking bottoms is more art than science, so it’s best to focus on ranges and be flexible. Ideally, I’d like to see a retest of this week’s intraday low followed by a heavy volume reversal day for confirmation, but as I said, flexibility is key. Many leading stocks may officially bottom before the market, so selectively buying leaders could be the best approach for investors.

Overall, it’s too soon to declare every stock has found its footing, but using down days to buy leaders in strong sectors and industries could be savvier than indiscriminately selling at this point. It’s far easier to proactively and non-emotionally prune portfolios into strength, than weakness, so the best time to raise cash was when we recommended doing it in August, not today.

Top-rated sectors now

Weekly, we rank major sectors so members can see which baskets have alpha-friendly tailwinds. It also helps investors spot emerging positive or negative trends. For example, consumer goods — a defensive group — strengthened throughout August as technology weakened, adding conviction to thinking the market was due for a correction.

Currently, industrials, services, consumer goods, financials and technology are the best ponds to fish in large cap. The top mid-cap sectors are consumer goods, services, and basic materials, while basic materials, services, consumer goods, and industrials are best in small cap.

Because utilities and energy stocks remain weak across all market caps, it’s best to focus elsewhere for stocks to buy.

Source: Top Stocks for Tomorrow.

It can also be useful to track sector strength by market cap. For instance, large-cap industrials score better than small cap industrials, and small-cap basic materials scores higher than large-cap basic materials.

Source: Top Stocks for Tomorrow.

The strongest-scoring stocks now

Our scores provide a systematic and objective way to rank over 1,500 high-quality stocks. Weekly, we run every stock in our universe through a 7-factor gauntlet explained more here. Overall, our model assigns scores based on the following factors:

  • Forward earnings growth expectations
  • Historical trends in reporting earnings that beat Wall Street estimates
  • Insider buying
  • Short-term and long-term institutional money flow
  • Forward valuation relative to historical valuation
  • Contra-trend short interest analysis
  • Quarterly seasonality over the past decade

Because stock prices follow earnings over time, insiders buy for one reason; money flow reflects institutional sentiment, and seasonal patterns can rhyme, high-scoring stocks offer a solid source of new ideas.

This week, over 100 top-rated stocks were shared with members, including these 80 stocks. I’ve highlighted the stocks seeing the biggest increase in score for convenience.

Best Scoring 9/10/2020 4 WEEK MA
Company Name Symbol Sector INDUSTRY SCORE SCORE
BASIC MATERIALS
Enviva Partners, LP (EVA) BASIC MATERIALS LUMBER & WOOD PRODUCTION 105 107.5
The Sherwin-Williams Company (SHW) BASIC MATERIALS SPECIALTY CHEMICALS 100 98.75
Cleveland-Cliffs Inc. (CLF) BASIC MATERIALS STEEL 90 88.75
The Scotts Miracle-Gro Company (SMG) BASIC MATERIALS AGRICULTURAL INPUTS 90 92.5
Air Products and Chemicals, Inc. (APD) BASIC MATERIALS CHEMICALS 85 83.75
FMC Corporation (FMC) BASIC MATERIALS AGRICULTURAL INPUTS 85 81.25
Compass Minerals International, Inc. (CMP) BASIC MATERIALS OTHER INDUSTRIAL METALS & MINING 85 82.5
Ferro Corp (FOE) BASIC MATERIALS SPECIALTY CHEMICALS 85 83.75
CONSUMER GOODS
Wolverine World Wide, Inc. (WWW) CONSUMER GOODS FOOTWEAR & ACCESSORIES 115 108.75
Simply Good Foods (SMPL) CONSUMER GOODS PACKAGED FOODS 110 108.75
Fox Factory Holdings (FOXF) CONSUMER GOODS RECREATIONAL VEHICLES 105 106.25
Constellation Brands, Inc. (STZ) CONSUMER GOODS BEVERAGES 100 93.75
Archer-Daniels-Midland Company (ADM) CONSUMER GOODS FARM PRODUCTS 95 92.5
Bunge Limited (BG) CONSUMER GOODS FARM PRODUCTS 95 87.5
Newell Brands Inc. (NWL) CONSUMER GOODS HOUSEHOLD & PERSONAL PRODUCTS 95 90
The Procter & Gamble Company (PG) CONSUMER GOODS HOUSEHOLD & PERSONAL PRODUCTS 95 98.75
National Beverage Corp. (FIZZ) CONSUMER GOODS BEVERAGES 95 98.75
The Hain Celestial Group, Inc. (HAIN) CONSUMER GOODS PACKAGED FOODS 95 91.25
FINANCIALS
Aon plc (AON) FINANCIALS INSURANCE BROKERS 105 91.25
Bank of Montreal (BMO) FINANCIALS BANKS-DIVERSIFIED 100 91.25
Brown & Brown, Inc. (BRO) FINANCIALS INSURANCE BROKERS 100 101.25
FactSet Research Systems Inc. (FDS) FINANCIALS FINANCIAL DATA & STOCK EXCHANGES 100 98.75
Marsh & McLennan Companies, Inc. (MMC) FINANCIALS INSURANCE BROKERS 100 97.5
Assurant, Inc. (AIZ) FINANCIALS INSURANCE-SPECIALTY 100 100
Eaton Vance Corp. (EV) FINANCIALS ASSET MANAGEMENT 95 82.5
Intercontinental Exchange, Inc. (ICE) FINANCIALS FINANCIAL DATA & STOCK EXCHANGES 95 98.75
Royal Bank of Canada (RY) FINANCIALS BANKS-DIVERSIFIED 95 93.75
Sun Life Financial Inc. (SLF) FINANCIALS INSURANCE-DIVERSIFIED 95 95
HEALTHCARE
Dr. Reddy’s Laboratories Limited (RDY) HEALTHCARE DRUG MANUFACTURERS 100 96.25
Medpace Holdings, Inc. (MEDP) HEALTHCARE DIAGNOSTICS & RESEARCH 100 105
LeMaitre Vascular, Inc. (LMAT) HEALTHCARE MEDICAL INSTRUMENTS & SUPPLIES 100 101.25
Alexion Pharmaceuticals, Inc. (ALXN) HEALTHCARE BIOTECHNOLOGY 95 85
Amgen Inc. (AMGN) HEALTHCARE DRUG MANUFACTURERS 95 86.25
DexCom, Inc. (DXCM) HEALTHCARE DIAGNOSTICS & RESEARCH 95 97.5
Edwards Lifesciences Corporation (EW) HEALTHCARE MEDICAL DEVICES 95 98.75
Merck & Co., Inc. (MRK) HEALTHCARE DRUG MANUFACTURERS 95 93.75
Penumbra, Inc. (PEN) HEALTHCARE MEDICAL DEVICES 95 96.25
Inspire Medical Systems, Inc. (INSP) HEALTHCARE MEDICAL DEVICES 95 98.75
INDUSTRIALS
Trinity Industries, Inc. (TRN) INDUSTRIALS RAILROADS 110 100
Arconic (ARNC) INDUSTRIALS SPECIALTY INDUSTRIAL MACHINERY 100 96.25
BWX Technologies, Inc. (BWXT) INDUSTRIALS AEROSPACE & DEFENSE 100 77.5
Emerson Electric Co. (EMR) INDUSTRIALS INDUSTRIAL EQUIPMENT & COMPONENTS 100 98.75
Old Dominion Freight Line, Inc. (ODFL) INDUSTRIALS TRUCKING 100 103.75
Republic Services, Inc. (RSG) INDUSTRIALS WASTE MANAGEMENT 100 98.75
The Middleby Corporation (MIDD) INDUSTRIALS DIVERSIFIED MACHINERY 100 101.25
Kforce Inc. (KFRC) INDUSTRIALS STAFFING & EMPLOYMENT SERVICES 100 95
AMETEK, Inc. (AME) INDUSTRIALS INDUSTRIAL ELECTRICAL EQUIPMENT 95 97.5
Deere & Company (DE) INDUSTRIALS FARM & CONSTRUCTION MACHINERY 95 93.75
Illinois Tool Works Inc. (ITW) INDUSTRIALS DIVERSIFIED MACHINERY 95 97.5
REITS
Iron Mountain Incorporated (IRM) REITS REIT-SPECIALTY 90 88.75
Prologis, Inc. (PLD) REITS REIT-INDUSTRIAL 85 86.25
CorePoint Lodging Inc. (CPLG) REITS REIT-HOTEL & MOTEL 85 67.5
Independence Realty Trust, Inc. (IRT) REITS REIT-RESIDENTIAL 85 65
Equinix, Inc. (REIT) (EQIX) REITS REIT-SPECIALTY 80 81.25
Global Net Lease, Inc. (GNL) REITS REIT-OFFICE 80 82.5
Monmouth Real Estate Investment Corporation (MNR) REITS REIT-INDUSTRIAL 80 81.25
PennyMac Mortgage Investment Trust (PMT) REITS REIT-MORTGAGE 80 80
SERVICES
Churchill Downs (CHDN) SERVICES GAMBLING 110 112.5
Americas Car Mart (CRMT) SERVICES AUTO & TRUCK DEALERSHIPS 105 102.5
Group 1 Automotive, Inc. (GPI) SERVICES AUTO & TRUCK DEALERSHIPS 105 102.5
Equifax Inc. (EFX) SERVICES CONSULTING SERVICES 100 101.25
Vail Resorts, Inc. (MTN) SERVICES RESORTS & CASINOS 100 93.75
GameStop Corp. (GME) SERVICES SPECIALTY RETAIL 100 100
Booz Allen Hamilton Holding Corporation (BAH) SERVICES CONSULTING SERVICES 95 98.75
Brunswick Corporation (BC) SERVICES LEISURE 95 96.25
CarMax, Inc. (KMX) SERVICES AUTO & TRUCK DEALERSHIPS 95 97.5
Comcast Corporation (CMCSA) SERVICES ENTERTAINMENT 95 98.75
TECHNOLOGY
Fortive Corp (FTV) TECHNOLOGY SCIENTIFIC & TECHNICAL INSTRUMENTS 105 103.75
Black Knight, Inc. (BKI) TECHNOLOGY SOFTWARE-INFRASTRUCTURE 100 103.75
Guidewire Software, Inc. (GWRE) TECHNOLOGY SOFTWARE-APPLICATION 100 98.75
Open Text Corporation (OTEX) TECHNOLOGY SOFTWARE-APPLICATION 100 102.5
Palo Alto Networks, Inc. (PANW) TECHNOLOGY SOFTWARE-INFRASTRUCTURE 100 100
Verizon Communications Inc. (VZ) TECHNOLOGY TELECOM SERVICES 100 91.25
Coupa Software Incorporated (COUP) TECHNOLOGY SOFTWARE-APPLICATION 100 103.75
Fastly, Inc. (FSLY) TECHNOLOGY SOFTWARE-APPLICATION 100 102.5
Gogo Inc. (GOGO) TECHNOLOGY TELECOM SERVICES 100 88.75
ANSYS, Inc. (ANSS) TECHNOLOGY SOFTWARE-APPLICATION 95 98.75
UTILITIES
Brookfield Infrastructure Partners L.P. (BIP) UTILITIES UTILITIES-DIVERSIFIED 90 81.25
Brookfield Renewable Partners L.P. (BEP) UTILITIES UTILITIES-RENEWABLE 85 88.75
CenterPoint Energy, Inc. (CNP) UTILITIES UTILITIES-REGULATED GAS 85 82.5

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Disclosure: I am/we are long IGV, TSLA, SHOP, ZM, AAPL, AMGN, DXCM, INSP, FSLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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