Last time we looked at market breadth or rather the lack of it, and whether it mattered in the context of the recent AI-led rally. For once Tim and I found ourselves on different sides of the debate which was declared an honourable draw.
Since then, the S&P 500 has hit a new milestone having rallied 20% from its October 12th 2022 lows and under technical definitions, at least, exiting the bear market.
It’s also come to light that wider market breadth isn't as bad as it had been painted. Indeed, with US small caps as described by the Russell 2000 index and the ETF IWM rallied by +7.0% over the last month, much of those gains deriving from the price action seen in early June.
Last last week I posted the following comment on LinkedIn and in the Discord chat... 👇
I still need convincing that we are in a sustainable bull market and not an elongated bear market rally. But the price-following pragmatist in me has to concede that the former is a possibility.
A recession in the US could be avoided and thanks to lower energy prices the worst of inflation could be behind the country.
What's more JPM AM points to an improving outlook on earnings among analysts in both the US and Europe.
So, with all that in mind, it makes sense to look at which stocks/sectors could play catch up if we do enter a more broad-based and sustainable rally.
This slide from Schroders’ Global Equity report provides some historical context and a snapshot of the current equity landscape.
That’s counterbalanced by charts like this that show a very narrow leadership during 2023 to date but that could all change.
We should also note that BofA quants bull market checklist still has plenty of unchecked boxes.
My intuition is that the omens are looking more positive including some benign inflation prints. Here's the S&P 500 with inflation data prints shown in red 👇
With this in mind, an obvious place to start this exercise is the S&P 500 index or rather its constituent stocks.
The best way to examine the index seemed to be to create a spreadsheet, add fundamental data, stats on price, momentum and valuation, so that’s what I did.
With nearly 30,000 data points in the sheet, some data wrangling was required.
A good place to start was with high beta stocks that had underperformed the S&P 500 over the last 6 months so the first screen was to select stocks with higher beta than the index average which is just above 1.00 as you would expect.
The next filter was to look for stocks that had had a negative performance during 2023. We further trimmed the list by looking for stocks with a Forward PE that was below the index average of 22.63 times, I choose to look at stocks with a price-earnings ratio of <20 times.
At the same time however I was not looking for lost causes, rather I was on the hunt for stocks that could perform given the right catalysts and market sentiment.
So I looked for stocks with 5-year earnings and revenue growth of 20% or greater.
Finally, I wanted to find stocks that had already seen some momentum so I filtered for a positive one-month price change of greater than 0% as our hurdle.
We had a list of 34 tickers distributed as follows...
Timing is everything they say... At the same time as I ran the screen I created a watchlist so I could see the performance of these unloved stocks only two of which are now down over the last 5 days and the last day.
We could have refined this list further, and of course, we would have taken a deeper dive into stocks before trading them, but the general thrust is there and serves as a proof of concept.
And when we see five-day changes in the like of FCX, QCOM and NUE, which are up by +7.0%, +6.86% and +4.67%, respectively, I think we can say that we are on the right track!