The 7 Weakest Short-Term Momentum Names In The Dow Industrials

Jan. 22, 2022 1:18 AM ETAXP, DIA, DIS, DJI, GS, JPM, MMM, NKE, V11 Comments
Paul Franke profile picture
Paul Franke
18.02K Followers

Summary

  • During corrections and bear markets, avoiding the weakest names at the start of a move often proves a wise investment decision.
  • I am combining three different momentum sorts, including my basic proprietary formula, a StockCharts.com performance gauge, and Seeking Alpha's Quant Ratings.
  • I suspect the seven weakest picks in the Dow Jones Industrials will continue to drop faster (or rise slower) as a group vs. the overall index into early spring.

Falling Coin Stack

DNY59/iStock via Getty Images

For short-term traders wanting to ride the latest move lower in the market, sometimes just selling or shorting the weakest names in a peer group can net outsized gains (or prevent losses in longs) over a 2-6 week period. Unfortunately, reversals in blue chips from deeply oversold or overbought conditions can mean such a strategy is not always the best for positive results over extended periods of time.

Some of the most widely held and popular stocks are part of the Dow Jones Industrial Average, represented by the SPDR Dow Jones Industrial ETF (DIA). As the January market sell-off intensifies, I thought it would be useful to post a quick research article on the weakest participants in the longest functioning U.S. equity index.

Using (1) my proprietary formulas, (2) the standard momentum design for sector relative strength on StockCharts.com, and (3) Seeking Alpha's Quant Ratings, in combination, here are seven lagging picks out of the Dow 30 group to consider avoiding or selling over the next month or two.

For my system, I look at moving averages of price, relative price strength vs. the S&P 500, and creations of momentum like the Accumulation/Distribution Line, Negative Volume Index, and On Balance Volume (to list just a few I use in formula sorts) compared to other stocks. Again for this article, I am only sorting blue chips in the Dow Jones Industrial Average.

In no particular order, the short-term Sell/Avoid names are Walt Disney (DIS), Visa (V), NIKE (NKE), Goldman Sachs (GS), 3M (MMM), American Express (AXP), and JPMorgan Chase (JPM).

Walt Disney

Disney has been one of my favorite stocks to trade and watch over the decades. I have actually written two bearish articles on the world's leading entertainment company over the past year, my latest effort in June linked here. The stock quote was weak all of 2021, skidding faster as the year progressed. Too much investor optimism on both economic reopening benefits and growth in its streaming service are the main reasons. A truly extraordinary debt load from the 2019, 21st Century Fox media asset merger and a historic overvaluation vs. operating reality are others. A graph of 10-year high valuations on basic fundamentals is drawn below, including price to trailing earnings, sales, cash flow, and book value.

YCharts by SA

YCharts

My technical trading formulas are still not very optimistic on Disney, and StockCharts has a low 18 out of 100 relative strength score as a sector grade. Seeking Alpha's Quant reading is only average out of a 4000+ equity universe, to round out the bearish momentum summation. Former CEO Bob Iger absolutely had sound logic to dump most of his holdings in the spring and summer.

Seeking Alpha Table

Seeking Alpha Quant Ratings

StockCharts.com

StockCharts.com

Visa

Visa just plain got ahead of itself in 2021, and valuations are overdue to decline back toward a normalized range. Plus, price to sales of 20x is incredibly crazy vs. its sub-10x multiple a decade ago. Rising interest rates are not helpful for transaction numbers, and a monster negative real earnings yield of -4.5% are other reasons to be skittish on the stock. If inflation was running at 2% right now, not 7%, analysts could make an argument this name might be a worthwhile future gainer. As it stands near 7-year high valuations, a year or two of consolidation looks to be next.

YCharts by SA

YCharts

My momentum formulas are relatively bearish vs. other equity alternatives, with On Balance Volume looking quite negative since July. StockCharts gives the company a 28 relative sector score, and Seeking Alpha ranks Visa with an average trading momentum and earnings beat track record of late.

Seeking Alpha Table

Seeking Alpha Quant Ratings

StockCharts.com

StockCharts.com

Nike

Nike's stock quote has cratered the last few months. Supply chain and labor cost issues in Asia, worries about consumer spending in 2022 as interest rates climb, and a stock quote way too expensive vs. its likely growth future curve are reasons for the sell-off. In a nutshell, the valuation picture for Nike has doubled vs. 2012 a decade ago. So, with earnings projected by analyst consensus to grow about 25% annually the next three years, any hiccup in results could drastically cut the share price.

YCharts by SA

YCharts

My proprietary momentum research places Nike in the bottom 30% of blue chips currently for 3-6 month trends. StockCharts puts a very weak 18 score on the name for sector performance. For some good news, SA Quant numbers are forecasting a slightly better setup than the current average backdrop.

Seeking Alpha Table

Seeking Alpha Quant Ratings

StockCharts.com

StockCharts.com

Goldman Sachs

Goldman is the only pick from this group sporting a below 10-year average valuation on trailing 12-month operating results. However, its stock chart is quite ugly in January, as a falloff in bond and stock pricing could hurt trading profitability in the near term. I wrote a bullish article on Goldman Sachs in August of 2020 here, when the stock was around $200 a share. So, owning it for a double in price into the summer of 2021 was not the worst idea. Now, I am Neutral to Bearish on GS.

YCharts by SA

YCharts

Again, on short-term momentum screens, GS trading trends do not look healthy. StockCharts gives the company a 23 sector strength score, while SA's Quant reading is average for investment banks and brokers, although mildly positive vs. all stocks traded on Wall Street.

Seeking Alpha Table

Seeking Alpha Quant Ratings

StockCharts.com

StockCharts.com

3M

Minnesota Mining and Manufacturing is the surprising pick of the bunch. It is typically a great stock to own in bear markets and corrections, a top defensive idea generally. Yet, the data suggests sellers have the upper hand vs. buying interest and volumes. Valuations are roughly normal vs. its 10-year trading history. All told, I would wager a reversal higher in MMM will appear before the others.

YCharts by SA

YCharts

But for now, trading the momentum trend, 3M looks like a pedestrian to bearish selection. My formula puts a bottom 20% tag on the company for momentum trends the last 3-6 months. StockCharts has a 28 sector performance grade, and SA computer models lists MMM in the middle of the pack out of 4000+ alternatives for your buy capital.

Seeking Alpha Table

Seeking Alpha Quant Ratings

StockCharts.com

StockCharts.com

American Express

Another financial/bank name to avoid right now, based on a sliding stock market and rising interest rates is American Express. Its valuation has doubled and stock quote more than doubled the March 2020 pandemic sell-off lows. Not exactly shocking news, as many stocks have gain better than 100% over 22 months, but my point is the company may be priced for perfection (like thousands of others in January 2022). The stock market is notoriously cyclical, much more so than the overall economy. If a Russia/Ukraine war rocks the global economy, or interest rates spike this year, American Express will find it difficult to climb in price from today. The stock is still overvalued by nearly 40%, measured against basic fundamental valuations the last decade. And, the popular argument floating around investor circles that higher interest rates always inflate bank earnings is not supported by historical facts.

YCharts by SA

YCharts

AXP's price has witnessed just a minor decline since its October peak, but momentum indicators supporting price have been sliding rapidly since July. StockCharts puts a 34 score on American Express for sector relative strength, the highest of the seven mentioned in this article, while SA places the name in a top 25% momentum position. Of the weakest financials and banks, AXP may have the strongest setup. I am nevertheless expecting more downside in the coming months.

Seeking Alpha Table

Seeking Alpha Quant Ratings

StockCharts.com

StockCharts.com

JPMorgan Chase

JPMorgan is the biggest bank in the U.S. by assets, and run by exceptional managers. Doesn't matter, as the U.S. financial markets succumb to selling. The valuation of shares on the underlying business is high vs. its 10-year trading history, but not extraordinarily so. CEO Jamie Dimon freaked everyone out on JPM's conference call last Friday, basically predicting the Federal Reserve will have to raise bank interest rates at every policy meeting in 2022 (starting in March) to match elevated inflation unlikely to come down on its own. This is one of the most pessimistic forecasts of any economist or bank forecaster.

YCharts by SA

YCharts

On Balance Volume trends have been consistently bearish since June, and the stock quote has been demolished by 12% over the last week of trading on worse than expected Q4 earnings news. StockCharts gives JPM a sector performance score of 29. However, Seeking Alpha computers rank its Quant setup (including earnings misses vs estimates) as the worst of the three big banks mentioned in this analysis.

Seeking Alpha Table

Seeking Alpha Quant Ratings

StockCharts.com

StockCharts.com

Final Thoughts

My momentum research work over many years suggests these seven companies, as a group equally weighted, will underperform the overall index over the next 2-6 weeks. If selling continues off the early January all-time high for the 30 Dow Jones Industrials, I suspect these names will lead the decline.

What could change their weak momentum performance? Each will have to deal with specific developments in their businesses. In terms of a theme, four are financials/banks/brokers, which tend to track price fluctuations generally for U.S. financial assets. Since the outlook for both stocks and bonds has turned overwhelming bearish the last couple of weeks, a reversal in asset prices to the upside would definitely be helpful, particularly for Goldman Sachs and JPMorgan. I wrote an article earlier this week linked here regarding the troubled future for U.S. equities and bonds, and Catch-22 situation the Fed finds itself, after allowing inflation to run wild last year.

If stocks were cheap relative to historical readings, surely any or all could reverse higher and generate nice gains for investors in 2022. But, as valuations remain extended, especially against 40-year high and still rising inflation categories, the odds favor more downside in U.S. stocks throughout 2022.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

This article was written by

Paul Franke profile picture
18.02K Followers
Nationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer.....Paul Franke is a private investor and speculator with 36 years of trading experience. Mr. Franke was Editor and Publisher of the Maverick Investor® newsletter during the 1990s, widely quoted by CNBC®, Barron’s®, the Washington Post® and Investor’s Business Daily®. Paul was consistently ranked among top investment advisors nationally for stock market and commodity macro views by Timer Digest® during the 1990s. Mr. Franke was ranked #1 in the Motley Fool® CAPS stock picking contest during parts of 2008 and 2009, out of 60,000+ portfolios. Mr. Franke was Director of Research at Quantemonics Investing® from 2010-13, running several model portfolios on the Covestor.com mirror platform (including the least volatile, lowest beta, fully-invested equity portfolio on the site). As of August 2022, he was ranked in the Top 5% of bloggers by TipRanks® for stock picking performance on positions held one year. A contrarian stock picking style, along with daily algorithm analysis of fundamental and technical data have been developed into a system for finding stocks, named the “Victory Formation.” Supply/demand imbalances signaled by specific stock price and volume movements are a critical part of this formula for success. Mr. Franke suggests investors use 10% or 20% stop-loss levels on individual choices and a diversified approach of owning at least 50 well-positioned favorites to achieve regular stock market outperformance. The short sale of securities in overvalued, weak momentum stocks as pair trades and hedges is also a part of the Victory Formation long/short portfolio design. "Bottom Fishing Club" articles focus on deep-value candidates or stocks experiencing a major reversal in technical momentum to the upside. "Volume Breakout Report" articles discuss positive trend changes backed by strong price and volume trading action.

Disclosure: I/we have a beneficial short position in the shares of DIA either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This writing is for educational and informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. Any projections, market outlooks or estimates herein are forward looking statements and are based upon certain assumptions and should not be construed to be indicative of actual events that will occur. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. The author expressly disclaims all liability for errors and omissions in the service and for the use or interpretation by others of information contained herein. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. The author undertakes no obligation to correct, update or revise the information in this document or to otherwise provide any additional materials. Past performance is no guarantee of future returns.

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