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posted on 19 June 2017

Market And Sector Analysis 17 June 2017

Written by , Clarity Financial

S&P 500 Tear Sheet

The “Tear Sheet" below is a “reference sheet" provide some historical context to markets, sectors, etc. and looking for deviations from historical extremes.


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Performance Analysis

New! Thank you for all the comments on the performance analysis below. Due to many of the emails I got, I have swapped out the sector weight graph for a year-to-date performance range analysis. Keep the comments coming. (Email Me)

ETF Model Relative Performance Analysis


Sector Analysis

During last week’s pullback, we added modestly to our broader-based “core" holdings for the second time over the last couple of months. to participate with the breakout. Stops have been moved up and remain very tight.

While I remain very cautious on the overall market, the trend remains bullishly biased which keeps portfolios allocated on the long side for the time being. However, I will not be surprised by a reversal and failure of the breakout leading to us getting stopped out of positions.

On a bullish note, participation improved as the previously lagging Small and Mid-cap stocks picked up the slack from a faltering Nasdaq. The improvement suggests some short-term “support" to the market as rotation keeps the overall trend intact.

Sector Review

While Technology and Discretionary continued their recent weakness, both sectors are now testing their respective 50-dma’s. Currently, both sectors ARE NOT oversold as of yet suggesting there may be some more consolidation and stagnation over the next week. The correction does set up a potential trading opportunity provided support holds. We will monitor closely this next week.

Financials, Health Care, Materials, and Industrials maintained their lead this past week catching the money flows as investors rotated our of Tech and Discretionary. All of these sectors are now VERY overbought so some profit-taking and rebalancing is advised. As noted last week:

“Financials popped above their 50-dma average on a bill passed in Congress which will repeal Dodd-Frank and unleash the “holy hell" of Wall Street back onto Main Street. However, it’s good for the bank’s profit margins, so financial’s rose. The bill is unlikely to pass in the Senate due to the ‘Audit The Fed’ language contained in the bill. Therefore, I would ‘fade’ the financial rally for now."

Energy - Oil prices dropped below support at $45 on Friday and is now set up to test the lower range of $40/bbl in the weeks ahead. The supply of oil remains a problem with rig-counts rising and economic weakness setting in. With a major sector sell signal, and the cross of the 50-dma below the 200-dma, we remain out of the space for the time being.

Small and Mid-Cap stocks regained their respective 50-dma’s which removes their warning signs. Both sectors also improved on a relative basis by outperforming the broad market last week, but stumbled a bit this week. Maintain exposure for now, but do so cautiously with stops at support.

Emerging Markets and International Stocks as I noted last week:

“There is a good bit of risk built into international stocks currently. We took profits a few weeks ago, but the recent extension suggests another round of rebalancing is likely wise. Take profits and rebalance sector weights but continue to hold these sectors but stop levels should be moved up to the 50-dma."

That was very prudent advice as both markets stumbled this past week. A pull back to support will provide an opportunity to rebalance holdings in the short-term.

Gold - The rally in Gold over the last couple of weeks once again failed at critical resistance at 1300/oz keeping us out of our long-term positions. Short-term trading positions were stopped out last week on the drop below $1260/oz for now. With Gold back below the 50-dma, caution remains advised with hard stops set on a break below $1240/oz or the 200-dma.

S&P Dividend Stocks regained key support levels last week after briefly breaking below their 50-dma. Last week, we recommended holding current positions which worked well as the rotation out of Technology and Discretionary found a home in dividend yielding stocks. Continue to hold current positions but maintain stops at the recent lows.

Bonds and REIT’s continued their advances this week breaking solidly above resistance. With the 50-dma’s moving upward, these sectors can be added to selectively if underweight. However, this feeds back into the conundrum of the overall market, with both offensive and defensive sectors rallying, someone is going to be wrong. We will be watching these sectors for clues as to what happens next.

The table below shows thoughts on specific actions related to the current market environment.

(These are not recommendations or solicitations to take any action. This is for informational purposes only related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Portfolio Update:

The bullish trend remains positive, which keeps us allocated on the long side of the market for now.

Last week, during the correction, we added modestly to our core holdings for a second time this year. However, we are still maintaining slightly higher levels of cash currently, and still maintain “hedges" by being in areas that are traditionally “risk off" areas of the markets (Bonds, REITs, etc.) Those areas have enhanced returns this year on a total return basis.

This follows along with our instructions from last week:

“If this market can maintain its bullish underpinnings on Monday, we will review portfolios for potential additions of “risk" exposure where needed. However, be mindful, that we do so with the very strict “sell" discipline in place in the event that something goes wrong."

While I am not excited about the overall risk/return makeup of the market currently, as a portfolio manager it is the discipline and strategy that drives action. Everything else is secondary.

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