Lowes (LOW)

Market Cap: 70.1 B
Sector: Services, Home Improvement Stores
EPS Growth Next Year: 17%
Gross Margin: 34.8%
Return on Equity: 30%

Lowe's is the "other" Home Depot. The stocks trade similarly and they have almost identical fundamental metrics. If you like Home Depot from an investment standpoint, you will like Lowe's also. Lowe's and Home Depot recently reported earnings and both posted strong results. Lowe's reported an increase in Quarterly earnings over last Quarter, project earnings growth of 17% for next year and the following 5 years.

 In terms of price action LOW is now trading at new all-time highs and leading HD. Lowe's is offering a strong risk/reward at the current moment.

LOW Weekly chart

Lowe's has been trading mostly sideways since the beginning of 2015. The weekly chart has formed a bullish Cup/Handle base and this week following earnings, broke out of the trading range on strong volume. The weekly chart also shows an engulfing bar which means the stock's range completely engulfed all of last week's trading. This tends to happen at the beginning of a new trend.

We know this stock can rally, in 2014 the price appreciated from $45 per share up to $75 in nearly a straight line. It has since held closely to those highs, consolidating the large gains, and now appears ready to resume a new uptrend.

There is a saying in the markets, "history doesn't repeat, but it often rhymes". I think this applies here nicely. In mid 2013 until late 2014 LOW traded sideways after a strong rally. This consolidation lasted about 9-months. We then saw another strong move that was ignited by a surge in volume and a breakout from the prior range. This rally lasted for the next 6-months and gained almost 100%. The current setup is also a nearly 9-month consolidation. Price and volume are suggesting another similar rally could be imminent.

My indicators are aligned very nicely here and are confirming the strength in price. Relative Strength vs the SP500 remains in a clear uptrend and is making a new high. The Weekly MACD has resumed higher after pulling back to the zero line, and volume is expanding on the breakout showing institutional buying.

All signs point to a trend resumption here and using the swing low at $74.50 for our stop presents a very favorable risk/reward opportunity. If the potential rally is anything like the last two we can expect a move near the $130-150 area. That basically amounts to a $5 risk for a $50+ reward. I'll take 10-1 risk/reward every time its offered to me.

US Dollar (UUP)

Long the US Dollar is the next "don't fight the Fed" trade. With the strong Payrolls report for October and Janet Yellen's comments this past week, the Fed Fund Futures are now predicting a 70% chance of an interest rate increase in December.

The market responded on Friday and appears to have begun repricing assets to account for a rate hike in the near future. As we saw at the end of last week Lg-Cap stocks were flat, Small Caps led, Bonds got hit, along with Gold and interest rate sensitive groups. The two most positive reactions we saw were in Financials and the US Dollar. This is textbook "higher rates" rotation.

Financials and the Dollar are two groups that stand to benefit the most from a rate increase (tightening Fed). I prefer the Dollar trade currently because of its lower correlation to the SP500. Financials will still be beholden to the weight of the stock market while the Dollar will not. I also believe that while the market is in suspense for this change in policy, Lg-Cap stocks will be more volatile. Not to mention the strong rally stocks have recently had on the back of a more dovish Fed theory. Now with uncertainty being placed back into the market, things will likely be more choppy and range-bound until December.

US Dollar Weekly chart (UUP)

After consolidating its strong rally from 2014, UUP has traded in a tightening formation for the better part of 2015. It broke out of this pattern Friday triggering a continuation of the previous trend. 

For risk management purposes we can use the support lows at 24.40 on a weekly closing basis. Any move back below that would suggest this analysis is wrong and a more neutral Dollar position would be needed.

Our indicators all align to suggest a strong risk/reward setup. Volume surged the week of August 24th but has since tapered off. This week's increase in volume is a confirmation that strong buyers are behind this new breakout.

The MACD indicator has reset at the zero line and is now crossing bullishly back through its signal line. Relative Strength is also in an uptrend vs the SP500 and has been this way since the middle of 2014. Prior to this most recent 18-month outperformance, the Dollar has been in a Relative downtrend vs stocks since 2009. It appears a major shift is taking place.

Paycom Software (PAYC)

Market Cap: 2.7 B
Sector: Technology Application Software
Sales Growth Q/Q: 47.1%
EPS Growth This Year: 89.50%
EPS Growth Next Year: 30.90%
Gross Margin: 83.60%
Return on Equity: 22%


Paycom is growing fast! They recently announced third quarter results with revenues increasing 50% Quarter over Quarter. Beating earnings estimates for the 6th straight quarter and raising full year revenue guidance, this company is showing strong organic growth in a market struggling for sales.

The stock was rewarded today as shares soared 17% on six times the average trading volume. When this kind of demand comes into a stock after a multi-month consolidation, the subsequent gains can be impressive.

PAYC Daily

Today's action has the look of a "breakaway gap". The stock has been emerging from a sideways range and after pulling back to the 50 DMA, today's response to earnings propelled the stock to new all-time highs.

There appears to be tremendous strength behind this breakout as trading volume was at a new all-time high. The MACD indicator confirms a strengthening trend and Relative Strength vs the SP500 also set a new record high.

PAYC Weekly

The longer term weekly chart is setup similarly.

The market is suggesting Paycom is ready to begin a new leg higher. This is an emerging trend we can be a part of while managing our risk at the same time. The trade may need some room to breathe while it develops its new uptrend, so our stops should be far enough away for the stock to safely pullback, but also close enough that no real damage will be done to our capital should the market not cooperate. Due to the recent consolidation, the pivot low at $36 can be our initial stop.

With the way Paycom is growing, in an environment that's desperate for sales, this stock could double within the next year. Make no mistake, PAYC is not cheap. But this market isn't looking for cheap, this market has been rewarding growth, especially growth in revenues. With performance anxiety likely to increase among fund managers, stocks like Paycom will be easy targets for Alpha into year-end.