EB Weekly Portfolio Report - Sunday, November 24, 2019
Notes
First, I want to wish everyone a Happy Thanksgiving this week! Next, because it is a holiday week here in the U.S., we're going to have a modified schedule as participation in the stock market will dissipate throughout the week. There will be no "Trading Places LIVE" show on Wednesday, nor a Daily Market Report on Wednesday or Friday. I will be hosting a Market Vision 2020 mini-series event, but we'll make sure that all EB.com members receive room instructions as well. If you have plans for the holidays and cannot attend, no worries. We'll record the event and make it available to everyone.
On to this week's Portfolio Report....
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 Value portfolio is a new breed and is much different from the others; it's quite diversified, but how it ranks in volatility among the four remains to be seen - I would anticipate high volatility
- 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 more volatility expected on the other three
- 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.
Snapshot
Here's a weekly recap:
The above represents week-to-date returns since the new portfolios were announced on Tuesday - so only the past 3 trading days. In future weeks, the table above will represent the entire week's performance.
It's very, very early, but one goal that I had in setting up these portfolios this quarter was to reduce the impact of a market that moves more towards value stocks. Last quarter, we saw a reversal in the market as growth stocks faltered almost exactly as the August 19th portfolios were announced. This quarter, especially in the Model portfolio, I was sure to include a bank (JPM), an industrial (ITT) and a healthcare stock (VRTX) to help offset the relative weakness we had last quarter from carrying too many pure growth plays. If the market returns to a full growth stock mode, this could hinder our results, but I felt that the growth to value ratio (IWF:IWD) was too difficult to predict in the upcoming quarter. Last week, value stocks once again led growth stocks (beginning Wednesday) as you can see from the following 5 day hourly chart:
During those three days, value stocks clearly outperformed and yet 3 of our 4 portfolios were able to outperform the S&P 500. I realize it's a very small sample size (3 days), but I'm fairly certain that last quarter's Model portfolio would not have fared so well.
Keep in mind that the Aggressive portfolio, while having more representation in industrials and financials, is still going to benefit from an environment of growth. It was not surprising to see this portfolio underperform last week, given the outperformance by value stocks.
Finally, I'm not sure how much correlation I'd draw between value stocks (IWD) outperforming last week and our Value portfolio surging. I don't view the Value portfolio as a "value" fund in the traditional sense. I didn't look to book values or PEs when selecting the stocks for this portfolio. For the most part, they had recently been in downtrends prior to reversing those downtrends with better-than-expected revenues and earnings, so perhaps there's a "value" element, but I just want to make sure everyone understands that this is not necessarily a "deep value" kind of fund. Instead, in my view, they provide "technical value" in the sense that they've just broken downtrends and appear poised for further gains based on the "character change" on their charts. I fully expect there'll be home runs and total flops in this group, but the idea is that the strength of the winners will far outpace the weakness of the losers. Time will tell on this.
Weekly Summary
Benchmark S&P 500:
Occasionally, it's helpful to take a step back and look at the big picture weekly chart on the S&P 500. Here it is:
The weekly PPO is turning higher so we're seeing accelerating bullish momentum. That doesn't suggest that we're immune to sudden bouts of selling, however. So where should we look for support from a longer-term perspective? Well, I'd look at two levels. The easiest to identify would be the big breakout level at 3025. Technical Analysis 101 tells us that broken resistance becomes support. The second would be the rising 20 week EMA. During uptrends, 20 period EMAs have proven to be solid, not guaranteed, support levels. Currently, the 20 week EMA resides at 2997.
Model Portfolio:
This is a tough week to recap action as we had intraweek changes to each of our portfolios. It's much easier if I simply concentrate on the new portfolio components. The Model portfolio gained 0.23% since Tuesday's close and withstood the push back into value stocks. Here's the updated inception-to-date chart of the portfolio, which had its 1st birthday on Tuesday:
We added the 10 Model portfolio stocks as of Tuesday's close, but StockCharts.com doesn't give me a choice for a "3 day" summary to only review the Wednesday through Friday performance, so here's the current portfolio stocks and how they performed for all of last week:
As has been the case for awhile now, the consumer discretionary stocks underperformed and weighed on the overall performance. From the above, it looks like the discretionary stocks held up pretty well, but they showed more strength on Monday and Tuesday as growth stocks were more in favor. Beginning Wednesday, they lagged again as value stocks became more in favor. Fortunately, however, our financial (JPM), healthcare (VRTX), and industrial (ITT) helped to offset that consumer discretionary weakness. EVER is the only small cap stock in the Model portfolio and is sure to be quite volatile in the quarter ahead. It had a very strong week last week with solid volume and price action:
A combination of a breakout in internet stocks ($DJUSNS) above those 3 red arrows and continuing relative price action in EVER among its internet peers would be lethal and bullish. Meanwhile, several semiconductors were downgraded last week, which impacted AMAT. The entire group had been overbought, so some short-term selling isn't really a big deal. I do expect to see AMAT rebound in the weeks ahead.
Aggressive Portfolio:
The Aggressive portfolio struggled since Tuesday's close, losing 1.37%, a full percentage point below the S&P 500. Here's the Aggressive portfolio chart since its inception on May 19, 2019:
Here are the components of the Aggressive portfolio, ranked by last week's performance:
You can see from that far right column that this portfolio is likely to experience a lot of volatility. Last week alone, seven of the ten stocks either gained or lost 4% or more. If you're risk intolerant, I'd avoid this portfolio. It is comprised of 5 small caps, 4 mid caps and just 1 large cap (ISRG), which maybe not-so-coincidentally was flat last week. Taking a look at one of the losers from last week, AMKR had one of the best quarterly earnings reports, but is likely suffering from a combination of profit taking and the selloff in semiconductors last week. I still love this chart, but we could see a complete gap fill:
Breaking below the 20 day EMA leaves us with little support until the bottom of gap support at 11.09 is reached. That doesn't mean we'll go that low, but trying to predict the point of a reversal at any other level is difficult. Watching the 60 minute chart could identify a positive shorter-term divergence that might signal a reversal.
Income Portfolio:
The Income portfolio lost 0.17% since Tuesday's close, but that was only half of the S&P 500's 0.32% loss, so it sort of did its job - losing less in a down market. Also, by reviewing last week's summary performance, I think it'll be somewhat obvious that this group typically experiences much less volatility:
Last week, 7 of the Income portfolio's 10 components gained or lost 1.50% or less. Also, 5 of the stocks reside in either financials or industrials, with a 6th stock from healthcare. It shouldn't be subject to the wild fluctuations that we see from technology, consumer discretionary and communication services stocks. And where there is exposure to those more volatile areas, you can see the household names like Apple (AAPL), Microsoft (MSFT) and Intel (INTC). The latter did not seem to feel the effects from the downgrades in its industry last week:
Despite testing overhead price resistance, which could be problematic near-term, INTC managed to hold up very well last week, losing only a fraction, while many of its semiconductor peers fell several percentage points.
Value Portfolio:
Welcome to the new breed! I decided to put together a Value portfolio after receiving several emails last quarter about how overbought many stocks were in the other portfolios. When you're selecting stocks that are relative winners, it's difficult to avoid overbought stocks. These portfolios are all about momentum and relative strength. The Value portfolio does provide us a different angle, though, because many of these stocks were mired in downtrends just prior to producing excellent quarterly results and being rewarded with "change of character" breakouts to the upside. How well they will perform over the next quarter or year remains to be seen, but I definitely feel this gives our valued EB members another alternative in approaching the stock market with companies that report solid earnings.
For the 3 days ended Friday, the Value portfolio crushed the S&P 500, gaining 2.79%! Beginners luck? I'm not sure, but I do know that I'm even more intrigued after the last three days' performance. Here are the component stocks and how they performed last week:
7 of these 10 components gained more than 2.50% last week, a very solid start. Are they new emerging leaders or will they return to their prior downtrends? Once again, time will tell, but they're off to a tremendous start this quarter. To provide you an example of what I looked for in our Value portfolio, let's look at two of last week's big winners:
EVH:
SIEN:
Both EVH and SIEN were downtrending on an absolute basis and a relative basis. But both have now turned higher after reporting better-than-expected quarterly revenues and EPS. This garners attention from Wall Street and both have undergone on their charts what I refer to as a "character change". I now view both of these stocks as trending higher - until they prove otherwise.
Summary
Thanks to everyone that attended last week's Top 10 Stocks event! It's a lot of work to put together these portfolios, but overall the rewards have outweighed that work. Last quarter wasn't fun as Wall Street turned its attention to value stocks over growth stocks, but I'm confident that we'll see better results this quarter. If nothing else, last quarter proved that no trading style or strategy is immune to the uncertainty of the stock market. There are no guarantees.
Adding one more portfolio - the Value Portfolio - provides all of you one more trading strategy in approaching the stock market. I've never really tracked companies that break downtrends with solid earnings reports, but the opportunities seem solid. It'll be fun to track the results of all these strategies and to keep you posted weekly.
Please be safe in your travels this week. If you get a chance this week, and you haven't already done so, let me know what you think of the products and services here at EarningsBeats.com. We've changed a lot since I returned from StockCharts.com in September and I'd love to get your feedback on our new offerings - both positive and negative comments are absolutely welcome. Trust me, in this business, you need to have thick skin. It's never easy.
Happy trading and Happy Thanksgiving!
Tom Bowley, Chief Market Strategist
EarningsBeats.com
"Better timing. Better trades."