Welcome to the first edition of our relaunched Contrarian service. Previously reports were daily, from here on there will be one Contrarian report per week, the same approach, just more in-depth and focused.
Our ContraGauge (CG) has worked higher over the past couple of months, sealing the return of the unloved bull market. The indicator’s steady back and forth rise should continue. Uncertainty over the trade war cements a wall-of-worry and as contrarians, we like that. Only when the CG enters overbought and reverses sharply south will the next contrarian signal manifest, a sell signal. Hence, the present reading of 221.3 degrees is comfortable, the tide is up until a sell is indicated. Brief downside reactions are considered entry opportunities.
We start below by highlighting areas that are set to offer the best opportunities for the contrarian. We do not chase record highs, instead seek out the charts that are yet to pop.
At the U.S. index level, upside potential from here appears to be in the mid and small caps. The large indexes are at record highs and their momentum indicators, such as the 14-day RSI, are overbought. On the other hand, indexes such as the S&P Midcap 400 and S&P 600 Small Caps, have momentum slack. Furthermore, both indexes exhibit 3SR’s with the late May sell-off and subsequent recoveries in June.
The ratio between the S&P 600 Small Cap Index and the S&P 500 has kicked up following a failed break through a 5 year support shelf, resulting in a relative 3SR.
The longer term chart displays the rotation further, into small caps, over the past 20 years. The present uptick by the ratio has occurred from its deepest acceptable level – any deeper and the long-term trend would have disintegrated.
The transports sector has lagged so far this year, up 15.7% year-to-date, its close cousin, the S&P 500 Industrials sector, is up by 20.3%. The S&P 500 Transports Index chart shows a 3SR activated from the start of June with the recovery back above a six month shelf. The MACD indicator illustrates the comfortable momentum condition, only just rising through neutral, with ample overhead room. It would be no surprise to see a test of that record high in a few months’ time.
A clear 2.5 year range is evident on the ratio between the Transports sector and the S&P 500. The ratio is beginning to rise off the floor of that range, implying a rotation into the transports, from the general market. Favorable risk-to-reward ratio here given the close proximity of the range floor.
The longer term ratio chart shows how the range of the past couple of years fits within the overall uptrend (i.e. rotation into transports).
Small cap Skywest (airline services) is presently trending up following a false break of the $58 two month shelf, a minor 3SR. The 14-day RSI has room to climb. An extension to fresh record highs is expected over the next few weeks. The stock is also a 2019 outperformer, above its 30-week moving average and a P&F buy signal registered last week. Favorable from a contrarian perspective since it is fundamentally undervalued.
Triumph Group (aerospace components), another small cap, has surged over the past two weeks. The move follows a brief break of support drawn across from its March low. That move resulted in a bear-trap, a minor 3SR. The daily chart shows bullish volume activity coupled to a favorable MACD condition. The monthly chart reinforces the short-term bullish technicals, the end of 2018 saw a major 3SR drawn across from the 2008 low. P&F bullish action is yet to confirm but the building blocks are there: a deep Low Pole at the start of the year and a recent Bear-Trap. Reinforcing the contrarian charts is poor sentiment among investors.
Mid cap Oshkosh Truck (truck manufacturer) is nearing fresh 52-week highs. May of this year saw a break lower on trade war fears, culminating with an island reversal plus a 3SR in June. The relative ratio is positive, rising off its medium-term floor. The P&F chart confirmed the recent turnaround with a buy signal, on July 1st. Since that Double Top, a 3 box reversal down has provided a more favorable entry point.
Large cap Southwest Airlines is holding up reasonably well given recent negative news-flow. That event should now be fully priced in. The daily chart shows a 3SR activating at the start of June, with the weekly chart showing an additional 3SR in play, generated by the end of 2018 sell-off. The P&F chart is on a sell signal but that is developing fast into a Bear Trap, itself contained in an extending P&F 3SR. With volume activity firm and bullish, we expect a push higher soon, resuming the 2019 recovery.
Q2 earnings for C.H. Robinson Worldwide (freight transport and logistics) are due at month end. Q1 results beat but revenues were under, triggering a price spike down, building a 3SR. The brief news-driven break of $80 fostered a trap. With the on-balance-volume indicator holding up, the longer term uptrend should prevail. The P&F relative chart, versus the S&P 500, is shown to illustrate the turnaround underway from the bottom of a 5 year range (also note the relative P&F 3SR). A long-term relative recovery candidate.
Ford Motor is undertaking heavy restructuring; the price is recovering from nine lows hit at the end of 2018. That sell-off broke the floor of a $10 range underway since the start of 2010, the subsequent recovery this year develops a 3SR. Shorts entered into the multi-year lows are now trapped, in losing positions, and will need to cover. The Point & Figure chart shows a P&F 3SR – although it requires confirmation via a buy signal. Likewise, investors can only really cheer once the price breaks the 4 year down channel, with stabilization above $12. Nonetheless, the stock is a speculative long here, playing that multi-year range, using the 2018 low as a stop-loss.