August 4 Weekly Commentary and Stock Picks

Hello readers,

Much has happened during the last few weeks. As we have been continuously saying for sometimes that the Tech Sector (and Semiconductors in particular) is due for a pause and it is time for a rotation. When the market is in a rally mode then it typically climbs a wall of worries and while a rally needs a break then any good or bad news could become an excuse to trigger profit-taking and investors start fleeing towards shelter.

In this case, it was a combination of mixed signals by the Fed and some bad economic reports. Although, Fed has indicated that it cut interest rates in September but was not sure that inflation is fully under control, on the other hand weakening economic reports (employment rose to 4.3% in July as fewer jobs were added, job gains from prior months were adjusted downwards and ISM Manufacturing report showed a contraction in the manufacturing sector) portraying weaknesses in overall economy and fears of a short-term recession in near future were enough to spook the investors.

Couple these factors with the upcoming elections and global geopolitical atmosphere (e.g., possible widening of Middle East conflict) were enough for markets to lose key support levels. As such, if the markets do not recover soon then further damage is expected, and markets could go down to previous support levels of the year beginning.

We also emphasized during our recent commentaries that the period from August till Mid-October is generally bearish or struggling for the Stock Market based on the last 70 years of data. During this period, the riskier and growth equities (like Tech or Discretionary sectors represented by XLK and XLY) struggle and have an overall negative return while the defensive areas of the market (XLU, XLP and XLRE) tend to perform better as capital rotation typically occurs. That's why these areas are holding up well and investors/traders looking for short-term gains could find some value stocks there.

Our recommendation would be to stay away from the growth and riskier sectors like XLK and XLY as currently these sectors are weak and could face further damage. One exception is Communication (XLC) which has performed better due to strength shown by META, which is a major component there.

Two sectors which are somewhat holding at current levels are XLI (Industrial) and XLB (Materials). This is because there has been a rally in certain materials (like Copper, Gold etc.) and the mining sector while Industrial is treated as more stable segment compared to the high growth Tech areas.

Our list of interesting new stocks, therefore, mainly include some finds from these sectors while the overall cautious approach is advised as S&P 500 is currently under its 50 days Moving average and when this happens, most stocks struggle, and a low exposure is always suggested during these times. The VIX (representing market volatility) is at elevated levels and when it is above 20 (current: 23.39) then a cautious approach is required as volatility swings could easily cause individual stocks to move 5-15% on a daily basis which is way above our suggested stop loss levels of 7-8%.

Major Indices:

The performance of major Indices is summarized as follows:

Index Friday (8/2) Weekly YTD

S&P 500: -1.8% -2.06% +12.09%

Dow Jones Ind: -1.51% -2.1% +5.43%

Nasdaq 100: -2.4% -3.07% +9.58%

Russell 2000: -3.5% -6.4% +4.06%

Important Events next week:

Monday: Global Services PMI, Non-Manufacturing PMI

Wednesday: 10-Year Note Auction, Crude Oil Inventories

Thursday: Initial Jobless Claims, 30-Year Bond Auction

Important Earnings this week:

Berkshire Hathaway (BRKA), Amgen (AMGN), Caterpillar (CAT), SMCI, Disney (DIS), Shopify (SHOP)

Actionable Stocks:

Long-Term View: These stocks were mentioned as long-term holdings in our recent commentaries:

MSFT:

Although Microsoft is below its key support of 50-Day EMA, it is holding well at these levels. Aggressive investors could take a low exposure (less than 50%) at these levels with a tight stop loss below 387. Microsoft was hit hard due to its weak Azure Cloud Computing business growth, but it remains a long-term favorite.

NVDA:

As mentioned in our last several commentaries, Nvidia was due for a retreat as the entire Semiconductor group took a nose-dive. It undercuts its 50-day moving average as well and the chart shows further weakness below 100 or even 85 levels. Till then, it is better to hold and remain on sidelines to target a reversal.

AAPL:

Behaving like a real long-term leader, Apple ended Friday in a positive range besides a brutal Nasdaq pullback. It remains our long-term favorite as it is defending the 200 level.

AMD:

AMD has broken down and it is not recommended for entry at these levels till the trend reverses and it holds above the 200 days moving average line.

Medium- and Short-Term Picks:

Several Stocks mentioned in past commentaries triggered sell signals and it is suggested to either quit (at a maximum of 7-8% loss) the existing positions or not initiate new positions.

NVO:

Sell signal generated as it breached to 50 days EMA line. Let us wait for another base to form.

GOOGL:

As mentioned last time, Google broke its 50 days moving average and triggered a sell signal. Although, a long-term favorite but it is better not to initiate a new entry till it recovers above

AMZN:

Amazon was a disappointment and is the main reason behind the underperformance of XLY (Discretionary sector). Due to the technical damage, it is not recommended for action until it reverts back above its 50 days and 200 days moving averages.

Interesting New Stocks for Watchlist:

CBOE:

CBOE Global Markets Inc is one of the largest stock exchange operators in the US and offers trading across a diverse range of products in multiple asset classes. It jumped on its earnings on Friday and is currently actionable looking to stage a breakout beyond 197.62. It might face resistance at 200 level and looks strong to test it.

EGO:

Eldorado Gold is a Canadian gold producing and exploration company with gold assets in Brazil and Turkey. With gold prices projected to rally by the year end (Goldman Sachs predict Gold to rise by 14% from current prices), it might be a suitable time to load some shares of this gold mining stock.

WPM:

Wheaton Precious Metals is one of the largest precious metal streaming companies in the world that generates its revenues primarily from the sale of gold, silver, and palladium. Its earnings announcement is due on 8/7 and if it turns higher, then it could be an interesting play to exploit the metals and gold rally. Keep it under watch for a possible action.

AU:

With its earnings announcement due on 08/06, AU is another gold mining company that looks solid to capitalize on gold rally. Watch for an entry after the earnings as it could easily test its recent highs at 30.09 with a tight stop loss below 26.22 (50 days EMA line).

COST:

The bellwether retailer is currently forming a base and a sustainable breakout above the EMA 50 line (826.34) could provide an entry for this medium-to-long-term stock. The stock has shown consistent appreciation and has increased by 49% during the last year.

RACE:

Do you like Ferrari race cars?, then you would also like its stock "RACE". Ferrari is engaged in designing, manufacturing and selling sports car. The stock has formed a 5 months base and seems to be breaking out from a buy point of 436.64. Aggressive investors could take a 50% position (amid current market conditions) to capitalize on any move beyond its current levels.

LH:

Laboratory Corporation of America Holdings or LabCorp is a leading healthcare diagnostics company, providing comprehensive clinical laboratory services and end-to-end drug development support. It announced its second-quarter earnings results on Aug 1 after which the stock rallied in a rattled market showing extra ordinary strength. Keep it on your watch list as if it will provide an entry if the gap from 219 is closed.

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Disclaimer:

The information provided here is for educational / learning purposes only and should not be taken as purchase or sell recommendations. Trading / Investing in Stocks and derivatives is highly risky and could result in a substantial or complete loss of invested capital.

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