Investing is hard…
I have to constantly evaluate and re-evaluate trends across all markets, and react in a way that prevents drawdowns.
So it’s not exactly easy to find stocks to focus on each week.
Mostly, the trends that need to be evaluated are one- and three-month returns. At least, those are the factors that the market seems to value more than others.
The primary questions are pretty straight forward.
Are they positive or negative?
Are they increasing or decreasing?
Are they accelerating or decelerating?
Then I ask the same three questions about macroeconomic data — primarily the various components of both gross domestic product and the Consumer Price Index.
Combining those datasets allows me to put price momentum into a broader economic context.
After that, putting together a basket of stocks to focus on gets pretty easy… just select the companies that have the clearest, strongest trends to match up with the current economic conditions.
However, when both economic and market conditions are toggling between two disparate outcomes, it can become difficult to tell exactly where we’re headed.
And that’s where I find myself Tuesday morning — toggling between a stagflationary environment where growth slows, and an inflationary environment where growth accelerates.
All while trying to put together a watchlist of stocks to focus on this week as we exit the long Labor Day weekend.
How the Markets Might be Shifting
My longer-term model still points toward stagflation — I’ve talked about that plenty on these pages over the past few months.
But there may be a case to make for inflation and growth to pick up.
Source: Johns Hopkins
The Street thinks this indicates “better” economic activity is on the way, presumably in terms of retail spending.
However, Google mobility data shows that delta didn’t affect retail traffic that much. In fact, it appears as though consumer activity has been essentially flat all summer.
Perhaps that’s due to pesky unemployment data, which remains high.
But 9 million people lost Federal “Pandemic Under Assistance” aid just this week, and presumably, many of those will now reenter the workplace.
Furthermore, presuming those jobs pay better than government assistance, it’s certainly possible to see a return to growth — though not anywhere near the levels of the multi-decade peak back in June.
The index I use to determine the market’s assessment on growth and inflation is the Russell 2000.
Per the methodology outlined above, whenever its one- and three-month momentum are accelerating faster and trending higher than larger-cap indices like the Nasdaq and the S&P 500, it’s a good indication that market sentiment is shifting to incredibly bullish.
Naturally, this trend will show up in one-month momentum first, and the trend is… well, obvious.
Source: The Alpha Cut Team
On a one-month basis, small caps have quickly pulled from deeply negative back to even, and are threatening to move higher…
Also keep in mind a ton of these small caps had a miserable 2020 due to the pandemic, so many will absolutely crush earnings comparisons this year… Let’s keep that fact in mind when trying to decide which stocks to focus on this week.
One point for a return to growth.
Now let’s take a look at the quarterly return chart.
Source: The Alpha Cut Team
Still negative, and trending up more slowly than large caps.
One point for stagflation… It’s a draw.
So the jury is still out. And under those conditions, I think it’s best to wait and watch.
Key Stocks to Focus on This Week
As such, let’s just keep focus on active trends, and add in some small caps on both sides for good measure.
Coincidentally, I’m watching two small caps in the retail space that post earnings this week — one bullish, one bearish.
On the bull side, Academy Sports & Outdoors Inc. (NYSE: ASO) has been absolutely en fuego, more than doubling year to date.
Competitor Dick’s Sporting Goods Inc. (NYSE: DKS) recently crushed its earnings report. And given the outlook for ASO should be similar, we should expect similar pin action when it reports before Thursday’s open
On the flipside, ugly bean bag manufacturer Lovesac Co. (Nasdaq: LOVE) also reports before Thursday’s open. Unlike ASO, “The Sac” doesn’t trade at a 10-time multiple.
No, its valuation is… well, it’s high.
There aren’t any companies out there that deserve to trade at 70 times earnings, so I’m looking for any opportunity to smack “The Sac.”
And also adding in some Real Estate plays, as that’s the only sector that has a supply-demand imbalance working in its favor, and is bullish over multiple durations.
On that side, let’s focus on both the SPDR Real Estate Select Sector ETF (NYSEArca: XLRE) and the iShares U.S. Home Construction ETF (NYSEArca: ITB).
Source: Fortune Research, Bloomberg
Longs on the top, shorts on the bottom… let’s see how market action shapes up for the stocks I’m focusing on this week.
Keep an eye on your inbox, though… I have a feeling things might get pretty busy.
All the best,