What are we looking at?
Canadian and U.S. consumer discretionary stocks.
The screen
We limited our pool to the S&P/TSX 60 index and the S&P 100 index.
To find the most promising, we looked at each stock's 40-week moving average (40wMA). This is the average closing price for the stock over a period of 40 weeks. Charting the moving average week by week gives us a sense of investor's behaviour: Are they growing more (or less) enthusiastic about the company's outlook and are they more (or less) likely to purchase the stock? Generally speaking, stocks that trade above their rising 40wMAs are the best candidates for investments; they are the ones that show a bullish pattern. We identified the status of each stock's average (rising, falling or flat) in the adjoining table.
We chose this indicator because stocks tend to stay relatively close to their 40wMAs. When stocks rise far above this average, investors often use this as an opportunity for profit taking, since this usually leads to a price correction toward the 40wMA. Similarly, when stocks decline far below this average, suggesting a change in trend, investors can usually expect a recovery rally to follow toward the average, providing a selling opportunity.
More about Phases & Cycles
Phases & Cycles Inc. has been providing independent research for more than 24 years, using behaviour analysis. It publishes investment ideas for both the Canadian and U.S. equity markets. Its research reaches more than 1,000 users across North America and Europe.
What did we find?
There are a total of 19 consumer discretionary stocks in the S&P/TSX 60 and the S&P 100 indexes. Fifteen of these are trading above their rising 40wMAs, three are below their flat 40wMAs and only one is trading below its falling 40wMA. This suggests significant strength in the consumer discretionary sector.
Stocks that are currently overbought and could have a minor pullback toward their 40wMAs include: Gildan Activewear Inc., Amazon.com Inc., Nike Inc., Starbucks Corp. and Walt Disney Co.
Stocks that are currently better suited for investment include: Canadian Tire Corp. Ltd., Thomson Reuters Corp., Home Depot Inc., McDonald's Corp. and Time Warner Inc. These stocks are currently trading above but near their rising 40wMAs and are most likely to start a new up-leg.
Readers should consult a professional before making investment decisions.
A more detailed list, covering a larger pool of consumer discretionary stocks, can be requested by e-mailing info@phases-cycles.com.
Monica Rizk is the senior technical analyst and Ron Meisels is the president of Phases & Cycles Inc. and he tweets at @Ronsbriefs. They may hold shares in companies profiled.