Friends of the Trend: 3 ETFs, 3 Stocks

by Johnson Research Group | January 8, 2013 1:41 pm

One of the simplest rules of investing is “the trend is your friend.” We tend to lose grip on simple rules like this when the market starts facing volatility, but the fact remains that numerous stocks still are riding friendly trends early in 2013.

Historically, our studies have shown that a stock or index is twice as likely to post a positive one-day return when its 50-day moving average is trending higher. Conversely, the same stock or index is twice as likely to log losing days when the trend is declining. And, of course, we have a model that quantifies the trend of more than 4,000 stocks and indices’ 50-day moving averages on a daily basis, making it a heckuva lot easier to find the friendly trends.

Looking at exchange-traded funds: An effective gauge of an ETF’s strength can be found by monitoring the percentage of its component companies that are trending higher or lower. The table below identifies the more widely traded ETFs, along with their respective percent of components trending higher. Think of this as one of the best breadth measures for a rally — the higher the percent, the stronger the ETF’s breadth.

Not surprisingly, homebuilders find themselves near the top of the list as the recovery-based rally continues to lift the sector into the new year. This continues to be a sector that we favor, along with a number of names within the group.

A group whose strength might surprise investors is materials. Like the homebuilders, this sector has benefited from investors’ bets that a recovery will follow us into 2013, benefiting companies like U.S. Steel (NYSE:X[1]), Monsanto (NYSE:MON[2]) and Air Products & Chemicals (NYSE:APD[3]).

As of Monday’s close, 75% of the companies within this group had 50-day moving averages that were trending higher, and only two were trading below their respective 50-day trendlines. Care to guess which two companies? Freeport-McMoRan Copper & Gold (NYSE:FCX[4]) and Newport Mining (NYSE:NEM[5]) — not surprising given the fact that the Market Vectors Gold Miners ETF (NYSE:GDX[6]) is at the bottom of the list.

Given the current trends, Investors should consider taking a look at the Materials Select Sector Fund SPDR (NYSE:XLB[7]), SPDR S&P Homebuilders ETF (NYSE:XHB[8]) and Technology Sector Fund SPDR (NYSE:XLK[9]) as bullish positions.

Drilling down a bit, there are some opportunities that we like at the individual stock level in each of these groups:

Standard Pacific

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Standard Pacific (NYSE:SPF[10]) is a builder that focuses on single-family attached and detached housing. The company’s shares more than doubled in 2012 as investors started posturing for a recovery in the housing market.

What we like in SPF is the potential for the short-term trade to get a boost from a short-covering rally, as the shares are shorted to almost 10 times the average daily volume of shares.

Ball Corp.

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Ball Corp.’s (NYSE:BLL[11]) business focuses on packaging and containers for everything from food to beauty products. The company also operates a division that designs, develops and manufactures aerospace systems comprising spacecraft, instruments and sensors for commercial, defense and national security applications.

BLL has been a consistent outperformer over the last year, returning 33% against its peers’ returns of around 10%. Despite the outperformance, the company was just downgraded by a major Wall Street firm today[12]. We love these type of downgrades, as it opens an opportunity to grab shares on a temporary discount.


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We’ve covered Fiserv (NASDAQ:FISV[13]) before as a non-tech tech that we love[14]. FISV provides electronic bill payment, card-based transaction processing, ACH transaction processing, account-to-account transfer products, and person-to-person payments — all of which are growing in popularity as consumers continue to shift to online payments and transactions.

FISV shares are breaking to new highs at the same time that the shorts are increasing their bets against the stock. Look for the shorts to get squeezed out of this one, breaking the stock into new high territory soon.

As of this writing, Johnson Research Group did not hold a position in any of the aforementioned securities.

  1. X:
  2. MON:
  3. APD:
  4. FCX:
  5. NEM:
  6. GDX:
  7. XLB:
  8. XHB:
  9. XLK:
  10. SPF:
  11. BLL:
  12. just downgraded by a major Wall Street firm today:
  13. FISV:
  14. as a non-tech tech that we love:

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