US Stock Market Analysis:, Commentary and Stock Picks - Nov 29

Stocks Rally continues its advance … Focus on Small and Mid-Caps

The stock market rally continues to gain momentum, with major indexes reaching or approaching new highs. The Russell 2000 small-cap index, along with the Dow Jones Industrial Average and S&P 500, have set new records. S&P 500 notched its best month in the last year with a 5.7% monthly gain. On the other hand, Russell 2000 captured a gain of 9.08% in November outperforming other major indices. This aligns with our previous commentary, which predicted the outperformance of small-cap and mid-cap stocks. In our last commentary we wrote as follows:

“On the other hand, the recent outperformance of small-cap and mid-cap stocks suggests a broadening of market participation beyond the "Magnificent Seven" large-cap technology stocks. This diversification indicates that investors are seeking opportunities in smaller companies, which may offer attractive valuations and growth prospects.”

The recent outperformance of small-cap and mid-cap stocks (SMIDs) is likely to continue into 2025 due to several favorable market dynamics:

Interest Rate Environment

Lower interest rates from recent Federal Reserve cuts benefit SMIDs by reducing their debt servicing costs, potentially improving earnings.

Attractive Valuations

SMIDs are trading at significant discounts compared to large-cap stocks, with mid-caps recently trading at 20.6x earnings versus 24.6x for large-caps.

Growth Potential

Historically, SMID companies have shown faster earnings growth than large-cap peers over the past decade, making them attractive to investors.

Market Dynamics

SMIDs offer greater sector diversification compared to tech-heavy large-caps, appealing to investors seeking balanced portfolios. Additionally, SMIDs are often M&A targets, with 96% of public M&A targets in the US being SMID-cap firms over the past 30 years.

Investor Sentiment

There is a rotation from overvalued mega-cap tech stocks towards more attractively valued SMIDs, contributing to their outperformance. Investors are also focusing on quality SMID stocks with strong fundamentals.

The upcoming November jobs report will be crucial in determining the Federal Reserve's next move. Estimates project a gain of 180,000 jobs overall, with 177,500 in the private sector, and a potential rise in the unemployment rate to 4.2%. These figures, along with other economic data, will influence whether the Fed implements a third consecutive rate cut or pauses at its December meeting.

The Nasdaq did not reach a new high due to weakness in Nvidia (NVDA) and other tech stocks, it remains close to its peak and gained 2.7% in November. The performance of the different indices is summarized as follows:

Index Friday (11/22) Weekly Monthly YTD 1 Year

S&P 500: +0.35% +1.06% +5.7% +26.47% +32.56%

Dow Jones Industrial: +0.42% +1.39% +6.34% +19.16% +26.76%

Nasdaq 100: +0.90% +1.87% +1.85% +24.39% +30.92%

Nasdaq Composite: +0.83% +1.13% +2.7% +28.02% +34.78%

Russell 2000: +0.38% +1.30% +9.08% +21.56% +36.82%

The performance of individual S&P 500 sectors for the last week and since the US elections is as follows:

Sector Weekly Performance

Materials, XLB: +0.73%

Utilities, XLU: +1.82%

Real Estate, XLRE: +2.06%

Industrial, XLI: +0.94%

Staples, XLP: +1.69%

Discretionary, XLY: +1.93%

Technology, XLK: +0.06%

Communications, XLC: +1.57%

Financials, XLF: +1.20%

Health Care, XLV: +2.25%

Energy, XLE: -1.79%

Health Care, Real Estate, Utilities and Staples led the pack while Energy lagged. Discretionary and Communication sectors also performed well but Technology lagged due to weakness in Nvidia and Semiconductors. The VanEck Semiconductor ETF (SMH) lost 1% for the week showing continuous decline (or perhaps consolidation) in stocks like Nvidia, Broadcom (AVGO) and AMD.

With election uncertainty behind us and major indexes trading above both short-term and long-term moving averages, the outlook appears promising for additional gains in December. Going forward, we are currently in a historically bullish period till Jan 18th, although it is not guaranteed but if history is a guide, then S&P 500 has returned a positive gain throughout this period. Holiday season and year-end portfolio rebalancing due to tax gains etc. are the main reasons behind this consistent up trend which is likely to recur.

Important Events next week:

Investors can anticipate a wealth of economic data set to be released in the upcoming week:

Monday (12/02): ISM Manufacturing PMI, S&P Global US Manufacturing PMI

Tuesday (12/03): JOLTS Job openings

Wednesday (12/04): ADP Nonfarm employment changes, S&P Global Services PMI, Factory Orders, ISM Non-Manufacturing PMI/Prices, Crude Oil Inventories, Fed Chair Powell speaks.

Thursday (12/05): Initial Jobless Claims

Friday (12/06): Average Hourly Earnings (MoM and YoY), Unemployment rate

Important Earnings this week:

Majority of companies have already announced their Q3 earnings results. Some which are due in the upcoming week are:

Monday (12/02): Zscaler (ZS)

Tuesday (12/03): Salesforce (CRM), Marvell Technology (MRVL)

Wednesday (12/04): Chewy (CHWY)

Thursday (12/05): DocuSign (DOCU), Samsara (IOT), Veeva Systems (VEEV), Signet Jewelers

Long-Term Stocks:

Our long-term stocks are those in which we have the conviction that they have strong business fundamentals and enjoy moats in their respective industries; hence the chances of long-term profits are high.

MSFT:

Microsoft gained 1.55% for the week and has been consolidating in a tight range for 3-4 months. We continue to think that this could be an opportunity to load up the shares for the long term with a stop loss below 384 while targeting the upper range of 487. Microsoft looks poised to make a move soon.

NVDA:

Although Nvidia gained 2.15% on Friday but for the week it lost 2.61% and showing weakness in price action for the last three weeks. We think the recent weakness will continue for a short period and a retest of 125-130 range is possible before aggressive investors find it as an opportunity to hop in again.

Given the recent history of Nvidia, any pullback to key moving averages (like 50-days EMA which it did on Thursday) will likely find support unless major surprises to its future guidance occur. We maintain a long-term buy and hold stance on Nvidia.

AAPL:

Apple staged another breakout to all-time highs and remains in our long-term favorite list. Aggressive investors could add to their positions at the current levels with a stop loss below 219 otherwise wait for a pullback to 220-225 levels.

COST:

Costco justified its selection as a long-term leader by breaking out to another new high. We mentioned during the last few weeks that any pullback is an opportunity for investors who like this long-term leader. At this point, any further pullback to its moving averages around 911-935 will provide another opportunity to add positions with a stop loss below 867.

Medium- and Short-Term Picks:

META:

Meta Platforms (META) is forming a flat base that also qualifies as base-on-base pattern. It remains a favorite in the medium and long term. As mentioned last week, it has provided an alternate entry since it has moved back above 565 with a tight stop loss below 550.

AMZN:

After two losing weeks, Amazon roared back last week with a 5.46% gain. We like its price action and see it as an actionable stock not far away from its high of 215.90. Amazon is likely to go to new highs amid the holidays season buying.

PLTR:

We mentioned last week that aggressive investors were accumulating shares, and an entry could be made. Its stock gained another 4.87% last week by breaking out to new highs. We think aggressive investors could still make an entry at current levels with a stop loss level of 58.85. However, it seems to be a bit extended and conservative investors could wait for a pullback to key moving averages (20 and 50-days moving averages).

As suggested earlier, this seem to be another AI winner and for the time being remains market favorite.

Interesting Stocks for Actions and 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:

Interesting New Picks:

PI

Another AI player which has net 300%+ since October 2023 is another artificial intelligence player which specializes in radio frequency semiconductors. Its second quarter earnings grew 152% year over year and are likely to keep this momentum. Although it has a high PE ratio, we expect the momentum to continue moving the stock above its key moving averages with a target of 240 and stop loss around 172.

ANET

Mentioned first last week, it looks like it is going to test its all-time high at 431 and hence the stock is actionable at current levels (suggest the normal stop loss of 7-8%).

ANF

Although ANF lost 1.51% last week after recent earnings but we think it is trading in a tight range and provides an entry if it moves and stays above 150. Suggest a Stop loss around 134.5 being the 200-day EMA line.

ALAB

Astera Labs gained 0.95% for the week and is steadily moving upwards. The stock also hit a new high of 113.85 before pulling back to as low as 96.79 and closing the week at 103.25. Aggressive investors could enter at current levels with a stop loss below 93. Caution: Being an IPO, it could have a much bigger range and hence greater risk, and larger stop losses are suggested. Sharp pullbacks are frequent and hence proper risk management strategies should be in place.

Stocks Picked earlier:

CMG:

Although CMG lost 0.79% last week stock is in a rising uptrend while consolidating at current levels. The stock is still actionable at current prices with a target to clear its previous high of 69.26 while maintaining a stop loss around 55.67.

VRT:

After gaining 16% in the previous week, it gave back 8.95% last week after finding support at its 20-day EMA (126). It is in a strong uptrend and currently actionable with a stop loss below 115.

LOAR:

After a huge gain of 16.67% in the previous week, the stock lost 2.40% last week. The stock gave pulled back to 20-days EMA before bouncing back.

As mentioned last week, an aggressive entry could be made as the stock is like to test the 100 level, otherwise wait for a pullback to the key moving averages (82-87)

Beware that it is a volatile stock and in case of a broader market sell-off, a stop loss could be triggered.

GE:

GE gained another 0.56% last week confirming our positive bias. It is being accumulated by institutions and has cleared its 50-day EMA line now. Analysts are also expecting it to generate 32% earnings growth in 2024. The stock is still actionable, targeting a move above 194.80 while a stop loss below 160.

HD

Mentioned two weeks ago, The Home Depot has gained 4% since then and has staged a breakout to all-time highs. Any pullback to the 415-420 range could be another alternate entry as the stock is still actionable with a stop loss below 381. A long-term uptrend is in place for this large cap stock.

AVGO:

Due to the last three weeks’ downward price action, we suggest waiting for a better entry. For existing positions, any break below 145.62 will be a sell signal.

CAVA:

We put a hold on this stock as its price action is showing weakness. Watch if it finds support at current levels and bounce backs above 150 level for a possible entry.

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