Constructive Value Proposition? How I Ride The Storms. - 2023/01/08
My ideas for the upcoming week.
Hello and welcome to the latest issue of 🕵 The Seeker 🕵
"The true seeker is the one who is always seeking, for he knows that the more he seeks, the more he will find." - The Talmud
As some of you emailed me that due to the last editions where I covered Visa V 0.00%↑ and Micron Technology MU 0.00%↑ you found some success and asked for potentially more content I’ve decided to stir things up a little. I will expand, and from now each article will cover two stock picks. They will be derived from our in-house proprietary quant screeners.
My goal is to present you with novel stock ideas and share with you my analysis process. The point here is not to tell and mislead you that these are 100% winners or so, but if you are trading and investing on a regular basis you know the struggle of generating good ideas. What I will be doing is providing you with well-elaborated and researched ideas with the aim to expand your view, and giving you some fresh opportunities that you might have missed, overlooked, or never thought of.
Disclaimer from the author: Please note that this is not professional investment advice and I am not a certified financial advisor. The views and ideas expressed here are solely my own and are for educational and entertainment purposes only. Trading and investing carry inherent risks, so be sure to conduct thorough research and due diligence before making any financial decisions.
What can you expect from this article:
Reflection on the past week
Some news and what to keep an eye for in the coming week
Stock Pick #1
Stock Pick #2
Recap of the passing week.
It was a good start to the year for the S&P 500 SPY 0.00%↑ and NASDAQ QQQ 0.00%↑ , both of which rose over 1% and broke their three-week losing streaks. This boost came on Friday driven by the jobs report. The move was somewhat illogical as the reported numbers were higher than expected. Despite the FED efforts to cool down the labor market, new 223,000 jobs were created in December, or 20 000 more than the estimated 203,000. Also, the unemployment rate falls an additional 0.2% to 3.5%.
The “good” thing, so to say, in the report was the slowdown in wage growth, which shows a potential easing of inflationary pressures.
That also lifted the prices of government bonds. Yields fell, with the 10-year U.S. Treasury bond closing around 3.56% on Friday, down sharply from 3.88% at the end of the previous week.
The coming week(Jan.9 - Jan.13):
Monday:
Raphael Bostic the Atlanta FED President speaks
Bank of England Huw Pill speak
Tuesday:
US Wholesale Inventories report
BoE Andrew Bailey Speak
Jerome Powell FED Chief Speaks
Wednesday:
No major events
Thursday THE BIG DAY:
US CPI and Initial Jobless Claims numbers (the last couple of months’ CPI figure release comes with a huge move for stocks futures)
Friday:
Bank Earnings Day: JPMorgan, Citi Bank, Wells Fargo, and Bank Of America
Stock Pick #1 #GS
My first pick is Goldman Sachs GS 0.00%↑
First off I will start by exploring potential price action patterns. So let’s jump to the chart.
Weekly Timeframe
After a challenging start to the year, the company's stock bottomed out at around 280$. This level was tested three times before the stock experienced a month-long rally. The bulls exhausted at around 350-360$ after which the price went on to make a higher low. There it formed a new demand zone and rallied again reaching 2-3 standard deviations and setting a new high. After that a retracement and consolidation, at around 340-350$, bouncing from the 20-period moving average and the 0.5 Fibb level.
The RSI has remained above 50, forming three consecutive higher highs and higher lows. Suggesting that the upward movement is likely to continue.
Daily Timeframe
The price has consolidated and found a support zone. The 14-period RSI broke its trendline and is now moving upward. The MACD line crossing above the signal line also adds confirmation to this potential reversal. Overall, it looks like the market is primed for a strong trend in the coming days.
Going forward… on the Daily Chart…
In early November, the price broke its previous structure and has since made higher highs and higher lows. The potential for a new high and a move above the 390$ level looks promising, with a solid risk-to-reward ratio.
Now I want to check the bigger picture and the industry general trend.
The below graph is the 50-Day Breadth Indicator of the XLF 0.00%↑ ETF. I chose this ETF to analyze the industry because it is the go-to for whoever wants exposure to the financial industry.
Currently, 76% of the XLF constituents are above their 50WMA signaling a strong bullish momentum across the whole industry.
What’s more both Goldman Sachs and the XLF have been outperforming the SP500 throughout the year.
As shown, the 6 and 3 months return were decent, with no sign of slowing down soon.
Some additional thoughts
The current economic environment, characterized by high-interest rates, has benefited the financial sector. As banks make money through - INTEREST - the higher rates can be seen as a positive for the industry. However with the FED determined to slow down the economy and bring inflation to the 2% level, an inevitable recession is on the way. Yes, the landing can be softer or harder, but a landing is guaranteed. Despite this, I remain bullish on the financial sector in the near to mid-term.
🚨 A potential risk 🚨
A thing I would definitely watch out for is the Earnings report for GS which is on the 17th of January. An earnings report is usually accompanied by a strong move in one direction, so it is a smart decision to either close the positions before the report or wait it out and enter after it.
My bet is that they will beat the estimates and be followed by a rally to a new higher high.
An early indicator would be Friday’s earnings reports of JPM 0.00%↑ , BAC 0.00%↑ , C 0.00%↑ , and WFC 0.00%↑ . This can give a glimpse of what to expect from Goldman Sachs.
Stock Pick #2 #ABBV
My second choice goes to AbbVie Inc ABBV 0.00%↑ . The pharmaceutical giant looks stronger than ever. One thing is for sure no matter if we are in a recession or not. The consumer can cut its spending from almost anywhere but never from medications, making the industry a good bet for the coming year.
As the saying goes The trend is your friend, and that’s exactly the case with AbbVie. It has been nothing but going up, since early October.
The daily price is forming a textbook Cup&Handle formation. After the consolidation in the handle phase, the price is ready to go higher. The momentum will push the price and in my opinion, it is headed to test the all-time high in the 180$ area.
The Relative Strength Index broke above its trend line and is moving upward to push the price. Furthermore, when we plot different standard deviations and volume profile, it becomes clear that there is a lot of support and volume right below current price levels!
To get a glimpse of the industry and its performance I will use the Pharma PPH 0.00%↑ ETF.
Both the stock and the overall industry had a terrific year, outperforming the market on all the time horizons. I think the narrative will continue in 2023 because Pharmaceuticals are deemed to be a safe haven in times of turbulence, such as rapid interest rates increase environment. On top of that the stock pays out a hefty 3.55% dividend. It is sitting on a healthy 20% TTM profit margin and is beating the earnings estimates consistently.
My opinion: I am bullish on the stock and the industry in general. A level of 175-185$ seems really plausible and the Risk-to-Reward opportunity looks decent.
That’s all from me for this one.
I would love to hear your thoughts, suggestions, and analyses in the comment section below.
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