It was a powerful week for stocks as the FOMC decision has given investors new confidence in the prospects for stocks in 2014. Though not all of the daily studies have confirmed that the market's correction is over, another higher close today will further support this view. The overseas markets and US futures are showing nice gains in early trading.
As I discussed last week, the start of tapering is not a reason to change your investment strategy and not a time to chase the ETFs that track the major market averages. Industry groups and individual stocks should still be considered for new purchases but the focus must be on the risk.
Even though the last few weeks of the year are generally characterized by low volume, there were several stocks and industry groups that had bullish surges in volume last week. The lagging homebuilding sector was one such group as the weekly analysis suggests it has finally bottomed. One of our holdings, Lennar Corp. (LEN) had a very strong close.
One stock that correlates well with the homebuilders also had a nice volume surge as did one Transport stock that was featured in Top Transport Picks for 2014, but as the charts below indicate, the entry levels are the key.
Chart Analysis: The iShares Dow Jones US Home Construction (ITB) is up 11.7% YTD but is still down almost 10% from the May high at $26.31. ITB has a broad exposure to the home construction and home furnishing stocks.
- The weekly chart shows last week's strong close above the prior high as the resistance at $23.70 is now being tested.
- There is further resistance at $24.51 with the weekly starc+ band at $25.48.
- There is minor support now at $23.35-$23.
- Last week's low at $22.25 was just above the prior four-week low at $22.19 and the quarterly pivot at $22.13.
- The weekly uptrend, line b, is now at $21.60.
- The relative performance has now moved above its WMA but still has key resistance at line c.
- The daily RS analysis (not shown) does suggest that a bottom is now in place.
- The volume surged in October and the OBV appeared to be bottoming.
- It has now turned up from its flat WMA, which is a bullish setup.
- The daily OBV looks strong as volume was double the average last Wednesday.
Leggett & Platt (LEG), a home furnishing and fixture company, has a $4.31 billion dollar market cap and current yield of 3.90%.
- LEG closed the week strong and above the quarterly pivot at $29.91.
- A move above the resistance at $31.32 will confirm the weekly bottom formation.
- There is further resistance at $31.80-$33.29.
- The weekly relative performance has broken its downtrend from the highs last spring, line d.
- Volume surged last week as it was double the daily average both last Wednesday and Friday.
- The weekly OBV moved above its WMA and the downtrend, line e.
- The daily RS and OBV analysis (not shown) both look strong.
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- The close last week was the highest since early November.
- A move above the $58.56 level will complete the weekly flag formation.
- The weekly relative performance has turned up sharply but is still below its WMA and the downtrend,
- The RS line has strong support at line c and the daily (not shown) has bottomed.
- The weekly OBV has turned up from support at line e and has moved back above its WMA.
- This confirms the positive OBV action in the daily analysis.
- There is minor support now in the $56.80-$57.30 area.
What It Means: Though a correction in the overall market is still likely as we head into 2014, these picks have rallied nicely from good support and the heavy volume signals strong accumulation.
I would look to establish initial longs on a slight pullback into last week's range but would add to positions if we do get a pullback to stronger support.
How to Profit: For the iShares Dow Jones US Home Construction (ITB), go 50% long at $23.36 and 50% at $22.77, with a stop at $21.87 (risk of approx. 5.1%).
For the Leggett & Platt (LEG), go 50% long at $30.31 and 50% at $29.67, with a stop at $28.49 (risk of approx. 5.0%).
For the PACCAR Inc. (PCAR), go 50% long at $57.31 and 50% at $56.88, with a stop at $54.79 (risk of approx. 4%).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.