October 18, Weekly Commentary, Market Analysis and Stocks Picks

Hello there,

Market continues to look strong:

The market rally is gaining momentum, propelling both the S&P 500 and the Dow Jones Industrial Average to new highs last week. S&P 500 marked its 47th record high of the year, displaying significant strength that has surprised many analysts, especially considering that September and October are traditionally weak months for the market, a trend observed since 1950.

Analysts note that this unexpected resilience is attributed to a combination of factors, including a growing economy, favorable Federal Reserve policies, and rising corporate profits. The current market conditions appear supportive of continued gains, although risks remain present. This performance stands in contrast to historical patterns, as markets often experience a downturn during these months.

Last week, the performance of major markets was as follows:

Index Friday (10/18) Weekly YTD 1 Year

S&P 500: +0.40% +0.85% +22.95% +35.93%

Dow Jones Industrial: +0.09% +0.96% +14.82% +28.55%

Nasdaq 100: +0.66% +0.26% +20.79% +36.32%

Nasdaq Composite: +0.63% +0.80% +23.17% +38.87%

Russell 2000: -0.21% +1.98% +13.41% +33.33%

The S&P 500 climbed by 0.9%, while the Dow Jones Industrial Average rose by 1%, both reaching record highs on Friday and marking their sixth consecutive week of gains. The Nasdaq also recovered from earlier losses, making strides to keep pace with the S&P 500. Notably, the Russell 2000 index, which tracks small-cap stocks, has joined the rally and has outperformed its larger counterparts so far this month. As said in earlier commentaries, the S&P 500 looks poised to test the 6000 level soon while Russell 2000 is expected to set a new all-time high in November.

Let us review the performance of individual S&P 500 sectors:

Sector Weekly Performance

Utilities, XLU: +3.41%

Real Estate, XLRE: +3.02%

Financials, XLF: +2.39%

Materials, XLB: +1.81%

Discretionary, XLY: +1.49%

Communications, XLC: +0.88%

Staples, XLP: +0.73%

Industrial, XLI: +0.61%

Technology, XLK: +0.04%

Healthcare, XLV: -0.49%

Energy, XLE: -2.66%

Looks like value stocks are perking up like Utilities, Real Estate and supported by Financials which traditionally like forth quarter of the year. At the bottom we again see Energy adding to its recent misery. Some political analysts have a view that oil prices are being kept low because of the upcoming US elections and they do not want oil prices to rise. Technology also struggled although it recovered its losses in the last two days.

Utilities have another driver. This past week, Alphabet’s Google and Amazon both announced investments in new kinds of nuclear reactors making a comeback for nuclear energy. This news lifted the stocks of companies that own nuclear reactors such as Constellation Energy and Vistra. Not only this, but it also lifted the stocks of companies that design and build new nuclear reactors like GE Vernova, Centrus Energy, Nuscale Power, Lightbridge etc. Therefore, this trend in nuclear energy could persist based on the investments planned by Google and Amazon.

On the other hand, when market rise is significantly contributed by the defensive sectors (like Utilities and Real Estate) and aggressive sectors like Technology, Communications and Discretionary take a back seat then it signals that investors are rotating their capitals to small caps (as shown by Russell 2000 strength which is testing its all-time highs) and defensive areas. Any bad news or big surprise and market rally could shatter, and a sharp pullback (or even a correction) is also a possibility. According to the research done by Tom Bowley (Earningbeats.com), if history is a guide, then October 21-26 has been the weakest period for the market since 1950. Does it mean we are going to see a sharp pullback? Nobody has a crystal ball, but we should be careful in selecting our picks and ready to cut the losses and exit the positions if the rally reverses.

Important Events next week:

Wednesday (10/23): Existing Home Sales

Thursday (10/24): Building Permits, Initial Jobless Claims, New Home Sales

Friday (10/25): Durable Goods Orders, Michigan Consumer Sentiment (Oct)

Important Earnings this week:

Later in the week, the third quarter earnings announcement season will kick in starting with banks.

Tuesday (10/22): GE Aerospace (GE), General Motors (GM), Lockheed Martin (LMT), Southern Copper (SCCO), Texas Instruments (TXN), Verizon (VZ)

Wednesday (10/23): Boeing (BA), Lam Research (LRCX), NextEra Energy (NEE), Pegasystems (PEGA), AT&T (T), T-Mobile (TMUS), Tesla (TSLA), Vertiv (VR)

Thursday (10/24): Honeywell (HON), Skechers (SKX), Northrop Grumman (NOC), Tractor Supply (TSCO)

Actionable Stocks:

Long-Term Stocks:

MSFT:

Microsoft is waiting for its upcoming earnings on October 30. We still maintain a hold onto this long-term leader and expect it to move forward after earnings and elections. One red flag is that Microsoft is not strong compared to its peers in its industry group. The earnings announcement on October 30th will set the path for Microsoft stock going forward.

NVDA:

Nvidia rose by 2.37% last week and increased by 13.64% in the last 30 days. It looks strong as it tried a break on Thursday before pulling back. Expect a handle before attempting another breakout past 140.89. Any pullback to 123 level will find another layer of buyers who could bring it up again. Its price action is hinting that investors are expecting another exceptionally good earnings report from Nvidia (due on November 20). Any surprises or weak future guidance however, could trigger a sell-off in Nvidia.

AAPL:

In line with our expectations, Apple also tried a breakout before pulling back. Any further pullback to its key moving averages around in 220-224 levels will find buyers again and will be healthy. It is showing good relative strength and is expected to show good earning results on October 31.

COST:

Costco has now pulled back below its 50-Day EMA and is providing a suitable entry at current levels with a tight stop loss at 860. It remains a long-term leader and current pullback provides an attractive entry.

Medium- and Short-Term Picks:

META:

Meta is extended at current levels. If it pulls back to its 50-day Moving Average around 550 then it will provide a better entry.

AMZN:

Amazon is still consolidating and eyeing a buy point at 195.36. The upcoming holiday season forecasts are favorable for Amazon and investors could push it beyond 200 eventually. Therefore, it is actionable at current levels as mentioned last week.

PLTR:

Palantir pulled back to its 20-day EMA on Wednesday and immediately found support to rise again. Any pullback to 20-day (40.23) or 50-day EMA (36.26) will be a better entry for this potential AI winner.

Interesting Stocks for Watchlist:

As stated earlier, we target companies which have strong fundamentals, continuous earnings growth and are expected to increase their earnings in future as well, so even if they drop with the broader market, chances of their rebound are stronger based on their relative strength to the rest of the market. Here are some stocks to consider:

AVGO:

As mentioned last week, a pullback to 170-175 level was likely to find support which it did. Broadcom is actionable at current levels, targeting the 200 level.

CMG:

We like CMG as it continues to consolidate and rise slowly before its upcoming earning announcement on October 29. The stock is actionable at current levels, targeting its previous highs at 69.26. Any move below 50 will be a sell signal.

PEGA:

Mentioned last week, PEGA is consolidating at current levels and could possibly make a breakout attempt. It is actionable at the current price level while the long-term indicators support a trend continuation targeting a 20% upside while maintaining an 8% stop loss below the 50-Day EMA.

MPLX:

Want a steady dividend / income generator, MPLX is an Ohio based midstream asset manager for Marathon Petroleum Company. It offers a 7.6% annual dividend yield with stock up by 21% on YTD basis. However, the stock is not a quick mover and therefore, is not likely to rise quickly in the near future. Nevertheless, it offers a solid dividend and is expected to grow its dividends amid strong earnings growth.

FRPT:

Freshpet is focused on the development, manufacturing, marketing, and distribution of pet food products. It was mentioned earlier as well, the stock has shown consistent growth since its August dip and is currently actionable at current prices with an upside target of 15-20% and a suggested stop loss at 132.

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