Stock Portfolio Update: Free Lunch Ends & Utilities Keep Going
By: Christopher Mistal
March 14, 2019
Here we go again. After a brief bout of weakness in early March, S&P 500 and NASDAQ have rebounded to strong resistance levels. Were it not for Boeing (BA) dragging down DJIA it would also likely be at resistance. This will mark the second time in March that resistance has stalled the rally. We have had our eye on S&P 500 2800/2815 since mid-January. Aside from resistance at previous support levels, S&P 500 and NASDAQ are also contending with monthly resistance right around the same levels (red-dashed lines in charts below). Perhaps typical mid-month March strength can propel indexes higher and through resistance soon. If not, then another mild retreat in the second half of March is more likely.
[DJIA Daily Bar Chart]
[S&P 500 Daily Bar Chart]
[NASDAQ Daily Bar Chart]
There is some encouraging technical evidence building that suggests a breakout in the near-term is probable. Advance/decline lines for NYSE, NASDAQ, Russell 2000 and S&P 500 are all positive and pointed higher after dipping in early March. NYSE and S&P 500 advance/decline lines have recovered and exceeded their old highs from last year. NASDAQ and Russell 2000 have not yet done so. If all four advance/decline lines maintain their trends higher then resistance could soon to be overcome. Such a breakout would likely result in further gains and the eventual formation of bullish golden crosses (50-day moving average crosses above the 200-day moving average) on the charts. Then the next major level of resistance will be the old all-time highs.
[Advance/Decline Lines Chart]
Stock Portfolio & Free Lunch Update
Over the last four weeks since last update, S&P 500 climbed 2.1% through yesterday’s close while Russell 2000 added 0.8% over the same time frame. Overall, the entire Stock Portfolio rose 0.5% excluding any dividends or trading fees. Large-Caps performed best, up 5.4% as defensive positions continued to perform and Southern Copper (SCCO) surged over 20%. Mid-caps also had a respectable four weeks, up 2.3% on average. Small-caps however, were a drag slipping 1.3% lower overall. All the Small-cap weakness was due to the last five remaining Free Lunch stocks that were all closed out.
Free Lunch 2018 has officially come to an end. Some potential gains were missed, but overall the strategy employed this year was effective in capturing a significant portion to the basket’s move higher. The final two positions from Free Lunch were closed out on March 1. The entire basket averaged 24.9% from December 24, 2018 through March 1, 2019. Of the 23 stocks selected, just three failed to provide a positive return while the best gain realized was 68.5% from NN, Inc. (NNBR). NYSE listed stocks performed best, averaging 27.0%. NASDAQ positions averaged 24.0%. Both compare favorably to the 15.1% NYSE advance and 19.9% NASDAQ move over the same time period. The bulk of the gains from the Free Lunch stocks were made prior to mid-February, which is consistent with historical trends. This is an encouraging sign as this perennial bargain-stock outperformance from late-December to mid-February and other recurring market patterns and trends have been in line with historical tendencies.. 
Defensive positions from last year continue to perform. Major indexes are currently struggling with strong resistance below previous highs, but the Utilities Index has broken out to new highs. Much of the strength in the sector is likely due to interest rates pulling back from recent highs and concerns over slowing growth (domestic and international). Some may view the strength in Utilities as a cautionary warning, but it could also be interpreted as a healthy amount of skepticism exists in the overall market. From a contrarian preceptive this is desirable and suggests the market could break through resistance and continue higher.
First quarter earnings season is quickly approaching and so is the window for issuing our Seasonal MACD Sell Signal for DJIA and S&P 500 (signal can occur as early as the close on April 1, 2019). Current expectations are for a retreat in earnings in the first quarter due to recent tepid economic data and some harsh winter weather. That bar seems a bit low considering the streak of earnings beats the market has produced. Plus last year earnings were up double-digits while the market declined. There appears to be room for further gains, but we will also stay on the alert for any additional signs of weakness that could weigh on the market and signal an early end to the Best Six Months.
All positions in the portfolio are on Hold. Please see portfolio table below for Current Advice and Stop Losses.
[Almanac Investor Stock Portfolio – March 13, 2019 Closes]