Numerous sources say that low quality stocks have led the recent US stock market rally. While that may be true in terms of percent change in price, looking at the question from the perspective of the slope of the primary trend, we draw a somewhat different conclusion about what’s doing well.
We calculated the percentage of companies in several categories with rising primary trends using these criteria: the 200-day simple moving average must be greater than its value 20 days ago, 40 days ago and 60 days ago (roughly from the beginning of the rally). Companies where the primary trend was rising before the rally began or for which the rally caused the primary trend to begin to rise would be counted by these criteria.
Here are the results:
- S&P 100: 1.0%
- S&P 500: 2.4%
- S&P 400: 9.5%
- S&P 600: 11.0%
- Nasdaq 100: 4.0%
- All US stocks: approximately 10%
- Highly rated companies for financial strength: 7.7%
- All dividend paying stocks with market-cap > $2.5 billion: 2.7%
- All non-dividend paying stocks with market-cap > $2.5 billion: 6.6%
Within the large cap category, consumer related and technology stocks accounted for virtually all of those with rising primary trends. Within those rated highly for financial strength that were also in upward primary trends, just over 1/2 are financial companies, almost all of which are regional banks.
Using the terms “high quality” and “low quality” seems too gross to us to describe leadership in terms of primary trend direction. These more granular observations may be more illuminating:
- Most US stocks are still in a primary downtrend
- Non-dividend paying stocks have a larger fraction in upward trends that dividend paying stocks
- Small-cap and medium-cap stocks are leading among those with rising primary trends
- Among large-cap stocks, those highly rated for financial strength have a larger percentage in rising primary trends than large-cap stocks that are not highly rated for financial strength
- The consumer related and technology stocks are in a more positive mode than other sectors.
- Among those companies highly rated for financial strength that are also in upward primary trends, regional banks lead.
Financially Strong Companies:
We identified 522 companies rated as financially strong (in the “A” range) by either S&P or Value Line. Of those, 40 (7.7%) have upward primary trends as we have defined that for this study (200-day average greater than one month ago, two months ago, and three months ago).
Here is a table of those 40 stocks, along with their yield, EV/EBITDA, 3-year sales growth, sector and industry (not recommendations, just data that may be useful for further research by those seeking financially conservative companies):
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Disclosure: We do not own any companies mentioned in this article.