Even with the broader U.S. indices at record levels, there are still plenty of opportunities among stocks that haven’t yet broken out to new highs of their own — and that could play catch-up if the market continues to climb in the weeks ahead.
On the other end of the spectrum, the resources sector remains home to a number of charts that look set to go lower even though the stocks have already been pounded during the past year.
Auto Parts Manufacturers Looking Strong
Auto parts isn’t exactly the first industry that comes to mind when it comes to potential trading opportunities, but the technical setup in this group is very interesting right now.
The broader sector, as measured by the Dow Jones U.S. Auto Parts Index, is trading just short of the all-time high established nearly two years ago. A number of stocks in the group have printed similar formations, with one — Lear (NYSE:LEA) — already having moved out to a new high after beating earnings estimates and announcing an $800 million buyback last week.
The breakout in Lear is a positive sign for several auto parts stocks that remain within striking distance of their 2011 highs, among them Magna International (NYSE:MGA), BorgWarner (NYSE:BWA), TRW Automotive Holdings (NYSE:TRW) and WABCO Holdings (NYSE:WBC). A number of other stocks in the group are in similar technical set-ups, but with further to go to retake their old highs: Dana Holding (NYSE:DAN) and Tenneco (NYSE:TEN) being prime examples.
Only the Magna International chart is shown below, but interested traders can scan the charts of all stocks in the industry group here:
Individual Stock Opportunities to Consider
Outside of the auto parts group, two stocks stand out as potential sources of beta in the coming weeks: Norfolk Southern (NYSE:NSC), and Nvidia (NASDAQ:NVDA).
NSC has come close to getting through the $78 level on numerous occasions in the past two years, so the stock — which closed Monday at $76.60 — is in a position to outperform if the market keeps climbing. With rising earnings estimates and a forward P/E at a reasonable 12, there’s latitude for decent follow through if the stock breaks out.
Nvidia, meanwhile, is emerging from a long, rounding base and has already moved above two key longer-term trendlines. More recently, NVDA has surmounted its 50- and 200-day moving averages. The stock has already climbed 12% above its low set earlier in the month, but the longer-term chart shows ample room for upside.
How Much Longer Can Homebuilders Rally?
Every time it seems that the homebuilders are running out of steam, the sector makes another move higher and chops up those who bet against the sector. Still, skeptics who are looking for a lower-risk entry point from the short side have a key technical level to watch.
The iShares Dow Jones U.S. Home Construction Index Fund ETF (NYSE:ITB) has a clear reference point at $22 — a level that represents support based on two separate trendlines. A drop below this level provides a green light to begin making bets against the homebuilders. Until then, bears need to exercise extreme caution with this high-beta group.
Steel Stocks at Another Crossroads
Are steel stocks a value opportunity or a trap? The charts might provide a clue.
A look at the three-year chart of Market Vectors Steel Index Fund (NYSE:SLX) shows support in the $39-$40 range and a potential breakout point above $45, where the upper trendline and 200-day moving average converge. This chart might look like it has some upside potential at first glance, but be careful: US Steel (NYSE:X) and ArcelorMittal (NYSE:MT) have already broken down out of a similar formation. SLX is therefore a better candidate for the watch list than for an immediate trade. If nothing else, it provides insight into the growth outlook for the world economy in general, and China in particular.
Be Alert for a Change in Leadership
Just as SLX can be an important indicator, investors also should keep an eye on the relative performance of the Consumer Staples SPDR (NYSE:XLP) vs. the Materials SPDR (NYSE:XLB).
XLP has vastly outperformed XLB on the year (18.1% to 5.6%), but this relationship has begun to reverse in the past week. Many consumer staples stocks have rallied to previously unheard of valuations amid the low-volatility/high-dividend trade, so watch the sector’s relative performance versus cyclicals for any sign of slippage. If XLP begins to exhibit consistent underperformance, it could be the signal that a change in market leadership is finally in the offing.
As of this writing, Daniel Putnam did not hold a position in any of the aforementioned securities.