foxex: On Pause

Chart Advisor | Focus on the Price

Tuesday, February 11, 2020

1. Stocks take pause at their highs

2. The financial companies likely to thrive

3. The real reason the Nasdaq hits new highs

Market Moves

Adding more evidence to the notion that markets may be overbought and sitting at resistance, stocks paused their upward drive as all three of the major indexes closed largely unchanged. If stocks are having trouble moving higher, we need not look any further than historic valuation measures for a reason why.

The chart below displays the current score of the Shiller-PE ratio for the S&P 500 collectively. The shockingly high levels suggest that stocks may be getting overpriced in a general sense. But such measures have no way of predicting a narrow time frame for a potential reversal. Until such action manifests itself in the price, investors have to plan that stocks will continue higher because, well, historically they have.

The Financial Companies Likely to Thrive

Fortunately there is evidence to suggest that stocks may continue higher despite historic valuation measures. After all, if investors still have money to invest, and they prefer stocks over all other investments, it just means more dollars chasing the best stocks higher.

Longtime Investopedia contributor Casey Murphy lays out a case why the financial sector may move higher soon. The financial sector, when combined with the technology sector, often drives overall market movement significantly higher, so that would be a welcome outcome. But if the financial sector is about to rise, which companies within it might we expect to do well? The answer is simple: those companies that have already been doing well recently.

The chart below narrows down the list of 1000 stocks in the financial sector to those with the best return on assets (ROA), return on equity (ROE), and return on investment (ROI). and which trade more than two hundred thousand shares on average per day. There are only three: Visa (V), Mastercard (MA) and Evercore (EVR).

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The Real Reason the Nasdaq Hits New Highs

Both Amazon (AMZN) and Netflix (NFLX) have moved higher recently, showing the best performance among the FAANG stocks so far this year, but one prominent stock in the Nasdaq 100 (NDX) has topped them, namely Microsoft (MSFT). Microsoft has quietly pressed higher dragging the index higher along with it. No surprise that the index would show unchanged when this stock was actually down for the day.

The noticeably strong start for the year suggests that the Nasdaq index will likely feature many stocks hitting new highs in the days to come.

The Bottom Line

Stocks took a breather from their torrid upward run so far this year and from the volatility driven by Coronavirus and trade war headlines. Can they go higher? Long time investors are nervous, but chart watchers know the party isn't over until the price starts to sing like a bear. Financial stocks may provide the next leg higher, and Microsoft is leading the charge among large technology companies.