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During the past three months, stocks have been in consolidation mode, maintaining modest gains after a torrid first half of the year.
But a lackluster performance since late June for broad stock indices has masked not just an internal rotation into defensive and value stocks, but also steadily improving market internals, according to a Monday research note by technical analyst Mark Newton of Newton Advisors.
Since June 23 through Friday’s close, the Dow Jones Industrial Average DJIA, -0.26% and S&P 500 index SPX, -0.53% had risen about 0.5%, while the Nasdaq Composite Index COMP, -1.13% had gained roughly 1.1%, at the same time that a rotation into defensive sectors has led utilities and real-estate stocks to lead the market.
“Markets remain in consolidation mode in the near-term after many indices and sectors tested July highs and stalled out,” Newton wrote, adding that the S&P 500 appears to be rangebound between 2,978 and 3,027 — or about a point above its closing high of 3,025.86.
However, market breadth, evidenced by the share of stocks on the New York Stock Exchange rising in value versus the share declining, the so-called Advance/Decline line, “is back to new all-time highs,” Newton said. He said “while many correctly point to a minor slowdown over the last week, the ability of Advance/Decline to have pushed back to new all-time highs is thought to be a positive for stock indices.”
Meanwhile, it creates a situation where many individual names are attractive buys even if broad measures of the stock market are set to bounce along in the coming months. Newton suggests the following five stocks based on recent price movement:
1). Anheuser-Busch InBev S.A (TICKER:BUD)
“BUD has gotten increasingly more attractive in the las couple weeks after having formed a rounding bottom formation right near its intermediate uptrend from last December’s lows,” Newton wrote. “This should allow for a push back higher to test recent highs and over, and the stock looks like an attractive risk/reward given this setup, with stops on longs found near $92 and targets projected higher near $110.”
2). Walgreens Boots Alliance Inc. (TICKER:WBA)
“This counter-trend play looks attractive given the degree of bounce off its lows followed by just mild consolidation before last Friday’s gains to multi-day closing highs on 4 times the average volume,” Newton wrote. “While the intermediate-term decline from 2015 remains very much intact, it’s thought that a tactical advance is possible to at least the low to mid-$60’s. Thus, Walgreens looks like a good risk/reward with momentum having turned higher. One should play long with stops at $49.31.”
3). Bristol-Myers Squibb Co. (TICKER:BMY)
“BMY has been gradually emerging since late last year, breaking out of a 10 month downtrend and now recouping former lows that were made in mid-May,” Newton pointed out. “Prices have been trending up nicely since late July as BMY looks to have bottomed at nearly an exact time when many other stocks were peaking…This looks to be an appealing candidate in a sector that is just now coming to life at a time when Technology has begun to wane. So mean reversion here looks bullish and can carry BMY up to the mid- $50s.”
“Conoco’s break out last week likely bodes well for additional strength, particularly given the recent turmoil in Saudi Arabia, which doesn’t appear as “fixed” as recent reports might suggest,” Newton argued. “Additional gains look likely in COP technically, given this recent improvement. Prices have broken out above the downtrend from last year, and reports are surfacing that the damage to Saudi infrastructure on an interim term basis might prove far more damaging than the tune heard in the media these days.”
Read more: Costly repairs to Saudi Aramco oil facilities could take months, not weeks
5). Entergy Corp. (TICKER:ETR)
“Ongoing signs of strength make ETR one to continue to favor given signs of yields starting to pull back in the last week,” Newton wrote. “For now, this remains one of the better positioned utilities technically and this recent consolidation should help momentum become less overbought and provide a decent risk/reward opportunity for a push back to new highs.”