There’s been a great deal of press lately regarding a handful of tech companies and the outsized role they’ve played in goosing the market averages.
And, indeed, it’s the case that Amazon, Alphabet (Google), Microsoft, Facebook and Apple have all been climbing recently, and contributed in great measure to the success of the NASDAQ, not to mention the S&P 500 in the last fortnight.
But a look at breadth figures for the rest of the big caps shows that the big five are not alone; nearly all the index components have been pulling their weight.
The percentage of S&P stocks trading above their 50 day moving averages, a rudimentary indicator of bullishness, climbed from 40% to nearly 60% in the last two weeks, as the market bumped up a solid 3%.
That’s as clear a sign as any that the market is not a mere five cylinder engine. One hundred and sixty big-name, big-cap stocks also turned sharply higher in that period.
Negativity in the Noise
Be that as it may, the biggest five U.S. stocks have been a great bet a) since New Year’s, b) since the election, and c) going back a full year, as the chart below demonstrates –
But we take issue with the exorbitantly high P/Es of these companies, even if the market doesn’t seem give a whit.
Consider, for instance, that Facebook today carries a multiple of 47x earnings, Google 31x, Microsoft 30x, and Amazon an outlandish and brash 178x. Only Apple, in the group, sports a relatively reasonable 17x trailing earnings multiple.
All of which makes us wary of a short term pullback from these giants. And if they keep rising, we can’t imagine they’ll have the juice of some of their more reasonably priced comrades.
So where do we turn!?
Not to panic, Lolita darling. Huey’s here.
Thankfully, there are still a large number of S&P 500 stocks that sport excellent fundamentals and technicals and have tremendous near-term prospects, to boot.
If the bombs keep flying…
That’s right, thanks to our new commander in chief and his apparent willingness to mix it up in some of the world’s more quarrelsome districts, we’re turning to the aerospace/defense sector today, where we find a bevy of companies that we believe will cash in tremendously in the current geo-political environment.
That’s not to say we’re headed for war – at least not imminently. It’s rather our belief that much of the bunker-busting and tomahawking we’ve witnessed of late is being carried out for economic reasons. That is, it’s being undertaken to establish U.S. deterrence/credibility in the military sphere, the better to create a more favorable negotiating position when it comes to sit with our trading partners.
The President has spoken ad nauseum of the need to revisit a number of trade pacts with both allies and foes, and a little action in the military sphere never harmed one’s economic interests when the time arrived to pop the corks and talk turkey.
Here’s a look at the overall aerospace and defense sector, as represented by the iShares U.S. Aerospace & Defense ETF (NYSE:ITA). You’ll notice that the performance since the election has also been solid, though not quite what the techs accomplished.
See also the positive action from both RSI and MACD (in green), neither too hot nor too cold, but clearly bullish.
Though the military sector has largely flown under the radar over the last few months, it’s been very reliable.
Fire When Ready!
Before we outline this week’s explosive trade, we have several prior initiatives to report on.
So belly up and take note.
The first was our January 17th bet on commodities. The letter was called Commodity Resurrection, and there we urged you to purchase the DBC April 16 CALL for $0.65 and sell the DBC April 16 PUT for $0.60. Total debit on the trade was $0.05.
As of options expiration, the CALLs closed out-of-the-money worthless, while the PUTs triggered a board lot long position in the stock at $16. And with DBC now trading at $14.83, we find ourselves down precisely 4117.
But we’re not closing shop just yet.
The technical on the commodities still look reasonable at this stage so we’re leaving the position open.
We’ll update you the minute we see it necessary to take action.
Our March 21st adventure had you purchase of the JCP January 5 PUT for $0.79 and sell the LOW January 57.50 PUT for $0.96. Total credit on the trade was $0.17
The letter was called RETAIL GYP!, and it worked out very well.
Today, the JCP PUT goes for $0.97 and the LOW PUT sells for $0.65. sell the former and buy back the latter and you come away with $0.39 on nothing spent. Adjusted for minimal commissions brings you to a profit of 160% on the affair.
And that beats a career as a Stool Texture Analyst.
Finally, we arrive at our April 11th trade from a letter called Spring Cleaning.
In that missive we recommended you sell the SLV September 29th 17 CALL for $1.17 and use the proceeds to buy the UUP September 15th 25 CALL for $1.19. Total debit on the trade was $0.02.
And today things have moved nicely in our favor. The SLV CALLs trade at $0.52 and the UUPs at $0.79. Buy back the former and sell the latter and you pocket $0.27 on $0.02 expended. That’s a gain of 1250% in three weeks, or an annual adjusted return of 21,250% for those adept at operating an abacus.
Here we go!
It’s Northrop Grumman (NYSE:NOC) that we’re flying this week, makers of planes, radar systems and drones – KaBOom! – a company that stands to gain greatly should we keep lighting fires about the globe.
But we particularly like their technical trajectory. Have a look below –
You will not find anywhere in the investment world a chart with so smoothly configured moving averages.
This is precision-fired predictability.
RSI and MACD indicators show no signs of overheating (in green), and the ascending triangle is a reliable continuation (bullish) pattern (in blue).
As soon as we get a break above resistance at $254, NOC will launch.- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]
With kind regards,
Hugh L. O’Haynew