More bullish rallies are likely

The stock market in the US has been extremely bullish in the past 9 months since the 20th of March. Actually, the main reason for that was the fact that investors saw the great market correction caused by the coronavirus pandemic as an amazing opportunity to start buying their favourite stocks, indices and ETFs at a huge discount. In fact, most of the biggest companies out there made corrections of between 30% and 70% in a month between the middle of February and the 20th of March, which represented a huge sell-off on the market that hadn’t been seen since the financial crisis of 2008.

Our stock and ETF analyses back in March clearly forecasted the great potential reversal from the low levels the market had reached back then and we were signaling for a strong buying activity at those levels.

Since then, we have seen a massive bullish rally all across the board with the leading companies out there reaching new all-time highs and breaking new records. In fact, the US economy has shown a pretty decent performance even during the global pandemic caused by the virus. Logically speaking, lots of businesses were hurt caused by the fact that during the lockdown they had to stop operating for a few months and many businesses sacked some of their employees, while others had to go bankrupt and so on. Yet, the overall economic situation managed to stay pretty solid and now it is expected to start going back to normal soon. Moreover, the recent news that came out showed that Pfizer-BioNtech as well as Moderna’s vaccines are more than 94% successful against the virus and the vaccines were approved in the UK and in the US already, meaning they have started using it and that has given investors and traders more reasons to believe in the fact that the situation with the pandemic is indeed improving and logically speaking that gives them a reason to invest their money on the market again, which in turn drives the stock market higher. The market has been very bullish in the past month since the vaccine results came out in the beginning of November.

As you know, we at Dow Experts always base our analyses on both fundamental and technical factors that have an impact on the different stocks, ETFs and indices out there.

For example, we believe the fundamental factors, such as economic reports and events, political factors, healthcare issues, companies announcing their new products and services, as well as delivering their quarterly financial statements are of utmost importance when it comes to being able to come up with the most complete and thorough analysis on the different instruments we are looking at.
Furthermore, we use the power of technical analysis in order to examine the different patterns and price movements on the chart, such as trend lines, support and resistance lines and different price continuation and reversal figures, and that in a combination with the technical indicators give us an opportunity to determine the right levels at which we should buy or sell a given stock or ETF in order to maximize our profit potential.

Our recent performance

Thanks to our extensive knowledge and experience on the market, we have been helping our followers maximize the profitability in the short, middle and longer term. Let’s have a look at our results for the stocks and ETFs we recommended for the month of November and some of our other recent picks:

  • Altria Group Inc. (MO) – bought at $36, it went up to $43.50 in 4 weeks = 21% return
  • Cisco Systems Inc. (CSCO) – bought $35.50, it went up to $45 in 4 weeks = 26.7% return
  • Kraft Heinz Co. (KHC) – bought $31, it went up to $35 in 4 weeks = 13% return
  • PayPal Inc. (PYPL) – bought @175, it went up to $35 in 4 weeks = 26.9% return
  • Advanced Micro Devices Inc. (AMD) – bought $75, it went up to $98 in 4 weeks = 31% return
  • Caterpillar Inc. (CAT) – bought @160, it went up to $183.50 in 4 weeks = 14.7% return
  • Broadcom (AVGO) – bought @360, it went up to $427 in 4 weeks = 18.3% return
  • Deere & Company (DE) – bought @229, it went up to $265 in 4 weeks = 15.7% return
  • Alibaba Inc. (BABA) – bought at $210, it went up to $320 in 16 weeks = 52.4% return
  • Nike Inc. (NKE) – bought $110, it went up to $140 in 8 weeks = 23.7% return
  • American Express (AXP) – bought @98, it went up to $125 in 4 weeks = 27.6% return
  • Delta Airlines (DAL) – bought @31, it went up to $43 in 4 weeks = 38.7% return
  • Take Two Interactive Software (TTWO) – bought @156, it went up to $203.90 in 4 weeks = 30.7% return
  • Keysight Technologies (KEYS) – bought @103, it went up to $127 in 4 weeks = 23.3% return
  • Electronic Arts Inc. (EA) – bought @124.5, it went up to $140 in 4 weeks = 12.4% return

Correlation analysis

Today’s analysis will focus on the 10-year positive correlation between the SPDR S&P 500 ETF Trust (SPY) and the Consumer Discretionary Select Sector SPDR Fund (XLY), which stands at 93%. We will also be looking at some of the biggest companies within the two ETFs and examine their latest performance in order to come up with some potential buying ideas at the significant corrections that have been taking place lately.

The SPY is the best-recognized and oldest ETF out there that tops rankings for the largest amount of assets under management and greatest trading volume.

In fact, the fund tracks the most popular US Index, the S&P 500 and invests in the large and midcap stocks selected by the S&P Committee.

The SPY has got assets under management of $264 billion at the moment and its average daily trading volume is $50 billion. In other words, it is an extremely liquid ETF that invests in the biggest companies within the S&P 500, giving an opportunity for investors to get an exposure to the most well-known companies out there without having to pick individual stocks by themselves – a very suitable option especially for less experienced investors.

As you know, we at Dow Experts always base our analyses on both fundamental and technical factors that have an impact on the different stocks, ETFs and indices out there.

For example, we believe the fundamental factors, such as economic reports and events, political factors, healthcare issues, companies announcing their new products and services, as well as delivering their quarterly financial statements are of utmost importance when it comes to being able to come up with the most complete and thorough analysis on the different instruments we are looking at.
Furthermore, we use the power of technical analysis in order to examine the different patterns and price movements on the chart, such as trend lines, support and resistance lines and different price continuation and reversal figures, and that in a combination with the technical indicators give us an opportunity to determine the right levels at which we should buy or sell a given stock or ETF in order to maximize our profit potential.

Technical side of things

By looking at the daily chart on the SPY, one could easily see the huge correction that was caused during the coronavirus outbreak where the price dropped from the $340 highs on the 20th of February to reach the lows at $220 a month later. The main reason for the drop during the coronavirus was caused by investors’ fear for the very likely recession coming within the economy, which was only logical taking into account the fact that the business started slowing down and lots of people lost their jobs because of that.

As we have already mentioned above, such a massive correction had not happened since the financial crisis of 2008 and investors have started realizing the great opportunity of buying at these low levels and maximizing their profit potential on the way up.

Therefore, as we expected the price started reversing back to the upside immediately after reaching the $220 lows to reach the $370 highs in early December. In fact, it is important to mention that the SPY didn’t only recover the whole movement back to the upside and the correction that had occurred but also managed to climb above the $338 highs it had reached before the massive sell-off occurred back in February. The main reason for that is because most of the leading stocks out there have done an incredible job over the past 9 months and that has been boosting the market higher ever since the 20th of March when the market bottomed out.

Overall, the technical picture looks very favourable for the SPY. The price has been in a massive uptrend since the 20th of March. In fact, thanks to its great performance so far in 2020, the SPY is up almost 70% since then. It has managed to break a few key resistance levels to the upside and giving more reasons to believe there is more bullish potential for the future that we can benefit from.

In the past few days in early December we saw a bit of a profit-taking correction from the $370 highs towards the key support at $364. In fact though, the profit-taking interest on the price led to a massive buying pressure at the strong support at $364 where investors and traders saw that correction as a good entry level for their buy positions where they would be able to buy at a little discount, follow the trend and maximize their profitability to the upside.

The main driver of the huge bullish rally lately has been the vaccine and the fact that the UK and the US have already approved it and have started using it. That gives lots of hopes that the whole situation with the virus will improve soon and we would go back to living a normal life. That by itself would help the economy and of course the stock market. So, investor sentiment has improved and the expectations for the future are positive. That’s a key reason for the current rally on the stock market.
We remain positive on the SPY and believe the recent short-term correction that occurred is giving us a great chance for buying the biggest ETF at a decent discount and make high profits to the upside.

As you know, we at Dow Experts have developed a correlation confirmation model that gives us a chance to identify great market movements that give us a chance to maximize our followers’ investment profitability. So, before we take any action on the SPY we need to make sure our bullish expectations are confirmed by the other ETF we are analyzing – the XLY, and only if we get a confirmation from it then we would proceed with buying the SPY. 

The Consumer Discretionary Select Sector SPDR Fund (XLY) is concentrated mostly on investing in the biggest companies within the consumer discretionary sector.  The XLY delivers a cheap and very liquid exposure to the biggest names within the sector, excluding small and mid-cap companies. In fact, the XLY invests in companies, such as Amazon, Home Depot, Mcdonald’s, Nike, Starbucks, General Motors and others.

By looking at the daily chart, one could easily see the huge bullish rally that has been going since the market bottomed out around the 20th of March. In fact, the price has gone up from $82 back then to $160 in early December, meaning the price has doubled in value since the huge sell-off that took place then. In fact, the XLY has been one of the best-performing ETFs in the meantime. Similarly to the SPY, the XLY has kept on breaking a few key resistance levels to the upside and giving further bullish indications. By looking at the chart, we could easily see the strong support (broken resistance) at $154-$156 that now plays as a major support line where lots of buying pressure is expected. Due to the recent correction from $159 to $156, the technical indicators have gone closer to the oversold territory and are soon expected to start reversing to the upside. Moreover, the lower Bollinger band matches perfectly with the support at that point and giving further bullish indications. We remain strongly bullish on the XLY for the next few weeks also because historically speaking the stock market has been quite bullish in December led by increased spending before Christmas and the fact that companies tend to increase their revenues and profits right before the holidays. That by itself helps companies grow their revenues and profits and report better financial statements for the 4th quarter of the year, which in turn is very positive for their future share price performance.

Chart: XLY

We will wait for a little further correction on the price and start buying at around $154.50-$155, just above the key support at $154 where lots of buying pressure is expected. In case the price drops further we would be interested in adding more to our buy positions at the next strong support at $150, which would give us a chance to improve our average price and make higher profits to the upside. Our initial profit-taking target is at $158, followed by the next target at $164-$167 where we would be fully cashing in our profits and wait for another correction that would give us a chance to buy again at a decent discount and at a strong support level.

Overall, the recent performance of the XLY clearly confirms our bullish stance on the SPY and we would be interested in buying around the current levels, which would give us a chance to maximize our followers’ profitability to the upside.

Chart: SPY

We will start buying actively at the first major support at $364. In case of a further drop on the price in the short-term we would be buying even more aggressively at the next strong support at $353-$354 where more buying pressure is expected. Our first take-profit target is set at $370, followed by the next target at $376-$380 where we would be fully collecting our profits.

In order to further provide our followers with a strategy on how to fully capitalize on the above-described patterns and correlations, we analyzed the performance of some of the biggest companies within the SPY & XLY that have a big impact on the overall performance of the two ETFs.

You can find them in our Stock Picks for December rubric.


Sincerely,

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