The following post was originally issued to TLS members on January 3, 2020.
A few sectors may see favorable buying opportunities into this news-induced pullback.
After a first trading day of 2020 that was like most of 2019, geopolitical events are sending stocks lower today. So how does the news change our investment outlook and strategy? If you know us at all, you know that it changes nothing for us. Until the exogenous developments actually produce shifts in the market data that feed our quantitative models, we will continue to follow the present strategy. For now, that means maintaining — or adding to — a healthy allocation to relative strength-leading areas of the stock market.
Fortunately, the array of sectors showing good relative strength has been broadening, leaving us with a current portfolio that is fairly diverse, with positions all in solid uptrends. That diversification is paying off as several of our positions (half of them, in fact) are actually higher today in a severely negative tape. It also means that we can be more patient in waiting for opportunities to add exposure. As you know, we do not recommend chasing prices higher or buying tickers that are already extended. Rather, wait for your opportunity to buy good relative strength sectors into pullbacks to support. A couple sectors are potentially providing such an opportunity into weakness nearby here. (FYI, we covered these sectors and their charts multiple times in Daily Strategy Sessions in recent weeks — including today).
One sector is dividend stocks. The S&P Dividend SPDR (SDY), in particular, has been constructively consolidating its most recent rally. At this point, it looks to be storing up fuel for its next run to new highs. Any buy below 108 would reap the benefits of a breakout and new up-leg. Ideal entry points would be ~106.50, ~106 and ~105.
Additionally, the Industrial SPDR (XLI) looks to be priming itself for another up-leg as well. After breaking above 2-year peaks in early November, XLI has been consolidating nicely for the past 2 months. Thus, it is not currently extended and has stored sufficient fuel for a breakout and new run higher. Any purchase below current levels ~82.60 should pay off in a breakout — with ideal entry points near ~80, ~79 and ~77.30.
Once again, despite the Iranian bombings, our investment outlook has not changed. Thus, we continue to look for opportunities to BTD in non-extended relative strength sectors at solid support levels. Dividend and industrial stocks represent such potential opportunities at present.
Stay tuned to the DSS posts for updates on these developments.
If you’d like to see these charts as they come out in real-time, follow us on Twitter and StockTwits. And if you’re interested in the daily “all-access” version of all our charts and research, please check out our site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!
Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.