When a group within an unloved sector start to work, I start to pay attention. This is what led me to the chart of Philip Morris (PM), as the stock jumped from 70 to 84 in just over a month.
The problem is that stocks like PM present an unattractive risk/reward profile as they approach all-time highs.
The chart of Philip Morris shows how well defensive stocks shined during the February to March downturn. But this name in particular also did well in the weeks after the March 23rd market low. PM made a new relative high in early April as it outperformed other stocks and accelerated back up to the mid-70’s.
That’s when the technical story began to unwind. From mid-April to early November, the stock consistently underperformed the S&P 500 as other sectors began to rack up gains. And it made a new 12-month relative low in early November.
Now in early December, the technical picture has improved dramatically with price and relative strength turning higher. PM broke above a short-term trendline in early December after breaking above its 50- and 200-day moving averages.
So, everything looks good, right? Not exactly.
First, the stock is now overbought, with an RSI above 70. While that on its own does not imply a negative outlook, it does recognize that the stock has moved at a much stronger pace than normal.
Second, this overbought condition is occurring right as PM reaches prior highs around $86. From a risk/reward perspective, there is limited upside (as the stock is nearing long-term highs) but plenty of downside risk with clear support levels on the chart.
It’s worth noting here that since stocks like PM pay such a hefty dividend, it can be helpful to look at the unadjusted chart as well. This removes the impact of dividends and allows you to see where the price was actually quoted over time.
Now we see that the true price resistance is more in the 90 to 92 area, suggesting that we could see further upside into that price range before the current uptrend reaches a meaningful peak.
As a trend follower, my primary goal is to identify trends and then follow them. With stocks like PM, higher highs and higher lows tell me that the path of least resistance is higher.
But as Philip Morris reaches back to the price point where the stock has topped out four times in the last two years, I have every reason to be skeptical of further upside from there.
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Twitter: @DKellerCMT
The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
