The S&P 500 Index is stuck at the price level first traded in December 2017, meaning it hasn't gained a penny in the past year. However, a basket of individual components has acted extremely well during this period, lifting to multi-year and all-time highs. An examination of these issues could be informative, telling us where the smart money is taking risk these days. It could also uncover hidden opportunities at the end of a tough year that many shareholders wish never happened.
There are many ways to identify the strongest index components, with year-to-date percentage gains at the top of the list. A more interesting technique organizes components by percentage positioning above or below the 200-day exponential moving average (EMA). This methodology has the advantage of finding stocks that are acting much better in 2018 than they did in prior years, which is an important metric for potential investors.
I suppose it makes sense that a company mining salt is sitting at the top of the S&P 500 performance list, given 2018's odd behavior. But McCormick & Company, Incorporated (MKC) has been a solid performer for the past decade, lifting more than 500% through a long series of all-time highs. The uptrend last stalled in July 2016, when the index took off in a post-Brexit relief rally. This contrary behavior reflects the stock's defensive nature while also explaining superior 2018 performance.
Breakout attempts through the first half of 2018 failed, but the stock finally cleared resistance in July, taking off in a powerful trend advance that has posted gains in excess of 40%. The rally stalled above $150 in early November, giving way to a trading range that has carved the outline of an inverse head and shoulders pattern. Two rally waves have failed to gain traction in the past week, but it seems foolish to bet against higher prices with this unlikely market leader.
Church and Dwight Co., Inc. (CHD) offers safe haven as well, with OxiClean, Trojan Brands and dozens of other household goods unlikely to lose market share during a trade war. The stock has also done well since last decade's economic collapse, gaining more than 600%. The long-term uptrend stalled at $53.68 in May 2016, giving way to rectangular trading range with support in the low $40s.
The stock broke out in August 2018 and tested new support in October. Price action since that time has carved two rally waves, followed by a symmetrical triangle pattern into December. This week's breakout looks sustainable, opening the door to the mid-$70s. The multi-year range ahead of the breakout predicts that the uptrend is just getting under way and could eventually reach a rising highs trendline now situated in the low $80s.
AutoZone, Inc. (AZO) rallied strongly between 2009 and 2015, topping out just above $800. It sold off through $500 in 2017, shaking out long-term shareholders, and bounced back to range resistance in January 2018. A steep decline into May ended near $500, giving way to a slow-motion uptick that completed a round trip into the January high in October. The stock carved the handle of a 10-month cup and handle pattern into early December and broke out last week, also mounting 2015 resistance.
This multi-year breakout bodes well for a long-term uptrend with an initial price target at $1,000, which marks psychological resistance. The timing is perfect, with U.S. auto manufacturers reporting a sales slowdown while foreign automakers worry about new tariffs. Used auto sales tend to grow rapidly during these cyclical downturns, increasing the need for do-it-yourself repairs.
The Bottom Line
The three strongest stocks in the S&P 500 Index could add to impressive 2018 gains in 2019, despite overbought technical readings.
<Disclosure: The author held no positions in the aforementioned securities at the time of publication.>