As we look toward 2017 and a fresh year of trading, it’s prudent for all market participants to map out a game plan. Your 2017 game plan should include the types of risks you’re willing to take, as well as at least some sort of idea as to what the new year holds for equities.
To be clear, I don’t believe in being able to “forecast” an entire calendar year’s ups and downs … any stock market game plan we form at the beginning of a year must be adjustable. If push comes to shove, it should also be entirely re-writable.
In my eyes, anyone attempting to pick stocks must consider where we are in the business cycle. This past November, for instance, featured an explosive rally in stocks and other risk assets following the U.S. election, but was also combined with several economic data points showing signs of improvement again.
The surging dollar (combined with a rally in bond yields) points toward a fresh cyclical bull market, all within the context of a larger secular bull market, which we have been in since 2009.
If indeed we find ourselves in the early stages of a new cyclical bull market, then looking toward early cyclical stocks such as the technology and industrial sector, as well as any otherwise strong single stock growth stories in 2017 makes sense.
Blue-Chip Stock Charts: Caterpillar (CAT)
Click to Enlarge Business expansion hopes and increased economic activity is a positive for industrial stocks. As a major manufacturer of industrial machinery, Caterpillar Inc. (NYSE:CAT) pops up on my list of go-to industrials.
Caterpillar’s current CEO Doug Oberhelman is set to step down at the end of 2016. Talking to many institutional investors I proffered that a new CEO may lead to better things for the company, and thus for CAT stock.
While much of Caterpillar’s recent sales growth has come from China’s dramatic economic expansion, there’s a case to be made that a fresh cyclical bull market could pick up at least some of the slack in demand from China. CAT stock saw a notable rally following Trump’s election, as his promise for infrastructure spending and rebuilding of bridges, roads, airports and more should spell into increased demand for Caterpillar’s products.
On the multi-year chart we see that at the early 2016 lows CAT stock has retraced an exact 61.80% of the entire rally off the 2009 lows into the 2011/2012 highs, which through the lens of Fibonacci analysis is an important retracement. Since the early 2014 lows the stock has rallied all the way back up toward the upper end of the down-slowing trading range marked by the purple dotted parallels.
Although the stock may be overbought heading into the early innings of 2017, the 50-, 100- and 200-day moving averages in yellow, blue and red, respectively, are starting to slope up and that along with the rest of the technical picture may act as support for a move toward $120 at some point in 2017.
Blue-Chip Stock Charts: Bank of America (BAC)
On the first chart I plotted BAC stock in red versus the SPY exchange-traded fund in blue. Here you can see that as a result of BAC stock’s dramatic underperformance during the financial crisis, it still has much catching up to do with SPY.
While I don’t expect this spread to close anytime soon, the trend is now pointing in the right direction. Furthermore, talk of an easier environment for the large banks under the upcoming Trump presidency could push more fund managers into financial stocks, which a good many had avoided in recent years due to the regulatory environment.
If indeed a new cyclical bull market is upon us and the economy finds itself in a new expansion phase, then BAC stock should benefit. Particularly if this is coupled with moderately rising interest rates and a friendlier regulatory environment.
Click to Enlarge On the multi-year weekly chart, we see that BAC stock broke past a multi-year horizontal line of resistance and the longer-term moving averages are slowly turning higher since the election.
While BofA stock looks near- to intermediate-term overbought at the current juncture, a pause or retracement lower and BAC stock could well rise into the high $20s.
Blue-Chip Stock Charts: Intel (INTC)
Click to Enlarge Certain technology stocks, such as Intel Corporation (NASDAQ:INTC), also fall into the cyclical camp. That’s to say that these stocks tend to outperform early on in cyclical bull markets. While this industry is littered with many names that could outperform INTC stock in 2017, I prefer to err on the side of caution with a large and proven semiconductor stock like Intel.
Looking at the multi-year chart, we see a similar pattern to that of shares of Bank of America, although the large pop and drop for Intel did not come leading into and through the 2007/2008 financial crisis, but rather at the turn of the century.
If you squint, you may see that in early 2015 INTC stock scored a marginal breakout past this horizontal line of resistance, but failed to hold on to the gains. The 2016 attempt at breaking past this horizontal line of resistance around the $37 to $38 area looks more promising.
INTC stock has essentially consolidated below this line of resistance since early 2015 and continued to develop the series of higher lows it has strung together since the 2009 lows. A break and hold above the $37 to $38 area in 2017 could push INTC stock toward the low $40s as a first upside target.
Blue-Chip Stock Charts: Facebook (FB)
Although FB stock did not not appreciate much in the second half of 2016, the company continues innovating and remains the go-to platform for social advertising. Aside from the obvious growth story that is Facebook, what continues to interest me is FB stock’s trend-following friendly chart.
Since late 2013, FB stock has worked higher in a well-defined uptrend, the orderliness of which through the lens of technical analysis is just about unrivaled. This has plenty of trend-following investors buying all the dips and selling all the rallies in the stock, which also makes it for an “easy” ride-along for retail investors.
Note that each dip to the yellow 50-week simple moving average (which also roughly lines up with the 200-day moving average) gets bought while rallies to the upper end of the range get sold. As the saying goes: “The trend is your friend.”
Equally important, however, is that trend followers a) remain patient to buy low and sell high and b) respect any major violations of this trend, if and when FB stock were to break below this multi-year channel. Whenever FB stock stages its next strong bounce off the lower end of this channel it will likely once again become a buy toward the upper end of range, which from the current standpoint is in the high $130s.
As always, risk management is the most important exercise in trading and investing and should FB stock break this multi-year channel to the downside it would need to show new convincing buy signals before it may resume the uptrend.
Blue-Chip Stock Charts: Alphabet (GOOG)
Click to Enlarge Another stock that from a pure growth rate perspective should also continue to perform well in 2017 is none other than Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL). The majority of online advertising takes place on the Google platform and with online advertising growing at a rapid clip this is an amazing bread and butter business for Alphabet.
The company isn’t only about online advertising, however, its feelers extend into a wide array of “modern technology” such as cloud computing, mobile operating systems, hardware internet and television services, virtual reality, artificial intelligence and much more. Alphabet is a behemoth that in this day and age in my eyes is difficult to bet against and needs to be bought on any dips.
On the multi-year weekly chart, not too dissimilar to what we saw on the charts of Facebook stock, GOOGL stock is displaying a well-defined uptrend. The stock’s blue 100-week simple moving average has acted as a great source of technical support over the past few years while the upper end of the upsloping channel continues to act as resistance.
Like FB stock, any break below trend must be respected while any rally toward the upper end of trend can be used to take intermediate-term profits. Nice trend following stocks such as FB stock and GOOGL stock can remain so for years and the trend will remain an investor’s friend until it ends.
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