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Top S&P 500 stocks to watch

There’s more caution evident in trading on the S&P 500, and the post-Brexit rally momentum seems to have run out of steam. Individual stock momentum plays are working out well as investors double down on recent winners, with Advance Auto Parts, H&R Block and Hewlett Packard among the winners.

Data on screen
Source: Bloomberg

Cautious trade is evident in the monthly sectoral returns of the S&P 500. The relatively low market beta and high yielding telecommunications and utilities sectors have dominated the monthly and year-to-date performance of the index. This shows that safe haven demand has been a far bigger driver of stock market performance than pursuit of earnings growth. The Brexit vote has effectively killed off the likelihood of any interest rate hike by the US Federal Reserve, and financial stocks continue to underperform as there is little hope for an improvement in net interest margins.

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Style factor returns are quite consistent with the sectoral performance, with the minimum volatility and yield factors seeing the best monthly and year-to-date performance. Both factors correspond strongly to the utilities and telecommunications sectors in the US. It’s also interesting to note that in this greater market volatility we have seen large caps outperform medium and small caps as investors seek haven in blue chips. The value factor has also steadily been performing over the past month as some investors begin to dip their toes back into some of the least loved sectors. But the momentum factor continues to perform well as investors still continue to double down on recent winners.

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The S&P 500 has had an impressive post-Brexit rebound, but it hasn’t been enough to carry it past its pre-Brexit highs. Some of that rebound momentum seems to be running out given the performance of global markets so far this week while the US was on holiday for 4 July. If global markets begin to reconsider the heady post-Brexit rebound, the index could be heading back to the middle of its recent trading range around 2070-2080.

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Rumours of KKR being on the verge of buying out Harley Davidson saw the biggest rally in the stock in seven years. Downbeat pharma company Endo International (ENDP) saw a massive rally on news it had obtained a new patent approval. Darden Restaurants (DRI), which owns The Olive Garden chain, sold off following a disappointing earnings release. And Micron Tech (MN) announced very weak fourth quarter guidance, seeing the stock selloff sharply afterwards.

The 15 highest and lowest 5-day SPX returns:

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Trade of the Week – Advance Auto Parts

Advance Auto Parts is looking incredibly bullish in a technical sense after forming a fairly clear head-and-shoulders pattern over the past three months. On Friday, it managed its highest close since 27 November and it looks like this current momentum may have $170 in its sights.

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H&R Block

H&R Block saw a big pop in its stock price on 7 June following its earnings surprise, but it has continued to pull back since then. However, in the post-Brexit bounce HRB looks like it may have the momentum to break through key resistance around $24.30. An upside breakout of the Ichimoku cloud would be very bullish in particular.

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Hewlett Packard

Hewlett Packard has been rallying strongly since March, and another wave higher was underway until Brexit concerns hit the stock. After regaining key support of $18.30 on Friday, the stock looks well placed for some of the prior momentum to continue to move the stock higher.

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Humana
Humana’s stock dived again after a brief post-Brexit rally as Aetna announced that it would have to sell some assets to carry out the proposed takeover of Humana. This has some in the markets clearly believing the deal may be in doubt, and stock looks like it has further to fall.

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Darden Restaurants 

Darden Restaurants, owner of The Olive Garden chain, sold off sharply after a disappointing earnings report last week. The sell-off has brought it very close to its recent support at $62.00, but the momentum behind the pullback could see it continue to fall.

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