Beaten down turnaround plays may offer profitable opportunities in coming weeks as the broad uptrend expands into underperformers and other issues that have missed out since the market turned higher after the presidential election. Identifying these laggards requires careful stock picking skills because December tax-selling season is moving into high gear, keeping a weight on the year’s biggest losers.
It’s said a rising market floats all boats, meaning that investors and market timers look for cheaper plays after primary holdings outperform and get technically overextended. This rotation lifts relative weak stocks in a rally expansion, reflected by increasingly bullish advance/decline readings aka market breadth. This is a healthy bull market phenomenon, especially when the broad tape shifts into dynamic activity, reflected by rising volume and greater price rate of change.
The bottom tier of S&P 500 components offers a large population of laggards to review for turnaround plays. The trick is to find stocks that are acting poorly in shorter time frames but holding bullish patterns in longer-term time frames. This temporal conflict often resolves with strong bounces at deep support levels, allowing the stock to play catch-up with the rest of the rising market.
Colgate-Palmolive Co. (CL) topped out just above $70 in July 2014 and entered an intermediate correction that ended after the August 2015 mini flash crash dumped the stock to a 3-year low at $50.84. It returned to a trendline of lower highs (blue line) in March 2016 and broke out, lifting to an all-time high at $75.38 in August. A topping pattern into September yielded a breakdown, followed by a series of lower lows into last week’s 10-month low at $64.46.
On Balance Volume (OBV) has fallen to the lowest low since 2015, denoting active distribution, while weekly Stochastics has dropped to the deepest oversold reading since 2010. The decline has reached trendline and 200-week EMA support at the same time, signaling a pullback play that could reach $70 in coming weeks. The 50-week EMA and 2015 high (red line) could stall the advance at that level.
Kimco Realty Corp. (KIM) may be turning the corner with other REITs after a long correction. It sold off from $53.60 to $6.33 during the 2007 – 2009 bear market and rolled over after rallying above the 50% selloff retracement in July 2016. The subsequent decline has now relinquished more than 70% of the prior rally wave and is trading close to the January 2016 low at $24.75.
It’s also reached major support at the 200-week EMA, with that level aligned tightly with a 5-year rising lows trendline. Selling pressure eased at this level on Nov. 4, with price action in the last six weeks carving a possible double bottom reversal. A rally above $27 will signal a breakout that could retrace at least 50% of the prior selloff. More importantly, the 2015 bounce starting at this support level eventually yielded a bull market high.
Extra Space Storage Inc. (EXR) rocketed higher after hitting an all-time low at $4.93 in 2009, returning to the 2007 high at $20.50 in 2011. It broke out in 2012, entered a powerful uptrend that’s posted a long series of all-time highs. Rally momentum stalled at the start of 2016, giving way to a rising wedge pattern that broke to the downside in July, dropping the stock to a 16-month low.
The monthly Stochastics oscillator has dropped to its deepest oversold reading since 2009 while the price is holding above deep support at the 200-week EMA, rising from $65. This marks an excellent level for the start of a turnaround that tests wedge resistance in the 80s. The channeled decline since August (red lines) tells us to wait for an upside channel break before taking a long position.
The Bottom Line
The broad uptrend that started in November is now expanding into underperforming market groups, opening the door to beaten-down turnaround plays that can be held into the first or second quarter of 2017. However, caution is advised on these setups due to tax selling pressure that should end when the calendar flips into January.