EB Weekly Portfolio Report - Sunday, October 20, 2019

Tom Bowley - October 20, 2019

Portfolio Rules and Objectives

Here are the common traits and objectives of each portfolio:

There are 10 leading stocks from 10 leading industries in each portfolio (at the time of selection)
They are held for an entire 90 day period, with no stops in place
Every stock will be held through ONE earnings report
The expectation is that relative winners will carry the portfolio to outperformance
They are all entered into as of February 19, May 19, August 19, and November 19 (these dates are used as we are generally past the majority of earnings reports by these dates)
Primary objective is to outperform the benchmark S&P 500

Here are several considerations for EB members:

I would expect the Aggressive portfolio to be the riskiest, followed by the Model portfolio, and then the Income portfolio
The Income portfolio stocks will all pay dividends, with the expected average dividend yield to be at least 1.5%
Drawdowns (losses) should be much milder on the Income portfolio, with much more volatility on the other two
You should own or trade these stocks in whatever manner is most comfortable for you; while we buy all 10 stocks as of the dates identified above, feel free to trade certain stocks or wait for pullbacks if the stocks are overbought
We have no idea what risk each member is willing or able to take. We are not registered investment advisors so be sure you understand the risk you take.
EarningsBeats.com shareholders/employees may own all or some of the portfolio stocks from time to time.

Weekly Summary

Benchmark S&P 500:

The S&P 500 remains in the bullish ascending triangle continuation pattern reflected last Sunday as it gained 0.54% this past week. Short-term, I am cautiously bullish U.S. equities. The trade war and upcoming Fed meeting are the primary reasons to remain near-term cautious. There is little doubt in my mind that we are ultimately heading higher based on how we've traded and the potential catalysts lined up to support a rally - namely, earnings, an increasingly bullish transportation group ($TRAN), and potentially massive rotation from overbought treasuries to consolidating equities. The S&P 500 is still awaiting its next bullish breakout, which would be a close above 3025:

I view the short-term trading range currently to be 2885-3025. We're closer to the upper end of this range than the lower end, so taking profits on short-term trades certainly would make some sense, although it's difficult to predict exactly when the S&P 500 makes its next major bullish advance. A breakout in the TRAN above 11000 would be a great start.

Model Portfolio:

The Model Portfolio had been making up ground vs. the benchmark S&P 500 for the past few weeks, but that was not the case last week. We saw a 1.09% loss in the Model portfolio last week, which was more than 1.5% below that of the S&P 500. A big slide in Alteryx (AYX) last week made a continuing portfolio rebound difficult to sustain. The long-term outperformance of the Model portfolio is still obvious on the following "since inception" chart:

Here's a recap how each stock in the Model portfolio performed last week:

ROKU strengthened to regain its 20 day EMA, which certainly was one BIG positive for the Model portfolio, but AYX and TWTR have been challenged recently. If the Model portfolio is to recover over the next month and outperform the S&P 500 for the fourth consecutive quarter, it may come down to how both TWTR and AYX perform going forward:

TWTR:

Here's the good news and bad news. First, the bad news. Internet stocks ($DJUSNS) have been solid in October, so that's not the problem with TWTR. We are big relative strength fans, so this development of relative weakness is difficult to ignore. The good news is that the recent selling is on relatively light volume, which suggests this is NOT institutional distribution. In other words, it's quite possible we'll see a rally into earnings similar to what we saw a few months ago when relative strength turned negative temporarily. The key for me will be whether TWTR can continue to hold onto the bottom of gap support just above 38.

AYX:

There are clearly a couple big differences between TWTR and AYX. While TWTR hasn't lost its earnings-related gap support from last quarter, that is LONG GONE for AYX. Also, TWTR's low volume selling is nothing like we've seen on AYX. The very heavy volume clearly could represent institution's ditching AYX. When AYX fell to the initial low near 110, I discussed the possibility of a further 10% drop to the upper 90s. Well, that was lost on Friday's close. AYX needs to see buyers coming immediately to its defense or the 79-80 level could become a magnet. The big problem last week was that many of the cloud stocks were crushed and AYX falls in that group. Workday, Inc. (WDAY) is one of the visible stocks in that space and experienced a similar 14% drop last week. A heavy volume, reversing candle would be welcome relief this week. Also, for those that prefer weekly charts, AYX is rapidly approaching its 50 week SMA, currently at 91. Perhaps a reversal there could be in order.

Aggressive Portfolio:

The Aggressive Portfolio gained 0.14% last week, but still trailed the benchmark S&P 500 gain. The huge outperformance in its first quarter is being challenged by its underperformance this quarter, although it still does show outperformance since inception:

Here's how the individual stocks in the Aggressive portfolio performed last week:

CECO is a broken stock. I pointed out a few weeks ago that I expected we'd see lower prices ahead and, unfortunately, that's been the case. It's the one stock in all of the portfolios that's making me consider changes going forward about possibly replacing portfolio stocks mid-quarter. EVER, like TWTR, has been a great big disappointment in the internet space. Losing support near 19 opened up the possible move to its earnings-related gap support:

EVER:

EVER is actually a stock that could be alerted this week for a rebound into earnings. If it hits gap support, check out the buyers that sent this stock higher from that 17 level. I'd be shocked if there were no buyers there. I believe EVER could make a ROKU-like recovery into earnings. We'll soon find out.

Income Portfolio:

The Income portfolio remains the one portfolio that really has been solid in terms of low volatility. For those who are most interested in capital preservation and income, the Income portfolio should be considered as that's the goal here. Last week, the Income portfolio dropped 0.50% so it clearly lagged the benchmark S&P 500. But even without considering its 2.0% or so average dividend yield on its 10 stocks, the Income portfolio has been solid vs. its benchmark index:

Here's how the individual stocks in the Income portfolio performed last week:

KO reported better-than-expected quarterly results last week, helping it to lead the Income portfolio. LMT and LHX, on the other hand, pulled the weekly results down as they were caught up in the aerospace ($DJUSAS) and defense stocks ($DJUSDN) underperformance last week. As we head into a new week, LHX might be the most technically-challenged of these 10 stocks because of the DJUSAS breakdown. Here's a look at the current chart:

LHX:

The DJUSAS and LHX both closed at multi-month lows on Friday. LHX rallied off its intraday low, but it needs a big reversal to start the week in order to maintain its current uptrend. I haven't given up on aerospace stocks, but Friday's drop (-3.92%) was rather significant. Again, a reversal would help here.

Summary

The good news is that after KO reported solid results and gapped higher, it became the 3rd of our portfolio stocks (out of 3) to come in ahead of expectations. Let's hope the next few weeks hold similar results and reactions.

I wish everyone a great week ahead!

Happy trading!

Tom Bowley, Chief Market Strategist

EarningsBeats.com

"Better timing. Better trades."