Part 4

Last month, we saw the strongest market rally since 1987, which is now giving investors a great opportunity to collect some profits and wait for better market prices in the coming weeks in order to re-open their long-term buying positions.

As usual, after we complete an ETF Correlation Analysis we pick the two best stocks in each ETF that have the highest probability of beating the market in the current environment.

One of our top stock picks from the Industrial Select Sector SPDR Fund (XLI) for the month of May is:

Delta Airlines (DAL)

Company Background

The company plays an important role within the XLI and has been a very attractive stock lately due to the coronavirus related correction in the market. Delta Airlines is one of the biggest airline companies in the US and operates over 5,400 flights daily and serves around 330 destinations 52 countries on 6 continents. Delta was one of the biggest losers during the latest sell-off. The main reason for that is logical – the airports were blocked and flights have been cancelled all around the world.

Current Position – COVID-19, Severe Stock Depreciation, Extremely Oversold

Therefore, we have seen a massive selling activity among investors in the mean time that led to a huge depreciation on the price, sending it from $60 in February to the lows at $20 in March (67% correction). Yet, there has been a lack of further selling activity ever since and for more than 1.5 months already the price has struggled to go lower than the $20 mark, giving an indication that investors have already started positioning themselves for a very likely upside reversal from the current levels and have been realizing that such a correction had not happened for 11 years since the financial crisis of 2008.

Yet, Delta’s financials have been very strong for many years and the company has been a leader in the sector it operates for a long time. In other words, since the situation with the virus has started to calm down already, there has been quite a lot of positive news coming from the US about some different medications that help recover from the coronavirus and a number of companies working hard towards producing a vaccine for the virus. All those factors are expected to have a positive impact on the whole stock market performance from now and we believe the current correction on Delta is giving us an amazing opportunity to add the stock to our portfolio.

Technical Analysis

The price is showing a lot of buying pressure at the $22-$21 support mark. The lower Bollinger band line matches with the support at $21 while the RSI is currently standing at 43 and heading lower as the price is trading at the current levels at $24. We have seen some profit taking correction from $27 towards the $24 in the past few days and the price gives some signals for a potential further correction of another $2-$3 to the downside that would send the price exactly towards the key support mark at $21-$22 where lots of buying activity is expected to take place after the huge 67% discount from the highs at $60.

Chart: Delta Airlines

We will wait for a further downside movement of around $2, which would give us a chance to start buying Delta stock at the major support at $22 where lots of buying pressure is expected. Should the price make a further movement to the downside, we will be adding more to our buy positions at the next key support mark at $20-$21.

Our first take profit-target will be at $28-$30, followed by the longer term target at $45-$50 where we will be fully cashing in our profits and wait for another profit-taking correction which would give us a chance to buy Delta at a lower price again and make higher profits to the upside.

One of our top stock picks from the Financial Select Sector SPDR Fund (XLF) for the month of May is:

American Express (AXP)

Company Background

The company plays a key role for the overall performance of the XLF ETF with its current 2.43% weight. American Express is a diversified financial services company that offers charge and credit card payment products, as well as travel-related services worldwide. In fact, the company has long ago become a global leader in the sector it operates. We have been analyzing AXP’s performance for a long time now. We must say the company’s financial performance for the past 5 years has been extremely strong. It has kept on growing its revenues and profits and making more money for its shareholders. We have actually been waiting for a long time to see such a great correction to the downside, which was now caused by the coronavirus pandemic. Due to the sell-off the share price dropped significantly from the highs at $137 in February to only $68 in March (50%.)

Current Position – Attractive Valuation, Improving Market Fundamentals

The share price of the company had not seen such a massive sell-off for a very long period of time and the current price is giving an amazing buying opportunity that would maximize our profitability to the upside. The substantial decline in the stock price has in turn improved the valuation of the company from a P/E perspective, as it is currently trading at just 13.56 times earnings, which is much lower than the historical average for the stock.

As we mentioned above, the situation in the US as well as in Europe is getting a lot better now and different countries have started loosening the precautions and given an opportunity for businesses to slowly go back to normal. Furthermore, people will soon be able to travel again, while the different shopping malls and other businesses will open their doors. That in turn is expected to increase American Express’ transactions due to the fact that customers will go back to shopping and using their debit and credit cards, which would boost the company’s revenues again. Therefore, we are currently looking to add American Express to our investment portfolio.

Technical Analysis

The daily chart shows that after the huge sell-off the price started bottoming out from the lows at $68 to reach the $100 where lots of taking profit interest took place and that led to another downside correction towards the current levels at $88. Yet, we could clearly see the strong support mark standing at $80 where lots of buying pressure has been taking place in the past and investors have been pushing it higher from those levels. The technical indicators have gone to the overbought territory and are currently heading down, giving an indication for a potential further drop from $88 to around $80-$82.

Chart: American Express Co.

Considering the chart is currently giving some indications for a potential further correction from the current levels that would send the price towards the key support at $80 where lots of buying pressure is expected, we will start buying just above that key support mark at around $82. Should the price drop further we will be interested in adding more to our buy position at the next strong support level at around $70-$75, which will give us a chance to improve our average cost basis and increase our profitability to the upside. Our first take-profit target is staying at $90, followed by the longer-term target at $100-$105 where we will be cashing all our profits.

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Kind regards,

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