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posted on 24 December 2016

Market And Sector Analysis 23 December 2016

Written by , Clarity Financial

S&P 500 Tear Sheet

Thank you for your recent suggestions, while not all requests are possible to fulfill due to data limitations, I do appreciate the input.

Update: As requested, I have added price momentum analysis for S&P 500, 400, & 600 indices.

If you have any suggestions or additions you would like to see, send me an email.

spy-tearsheet-121016


Sector Analysis

Comments

For a second week running, the market struggled but, as opposed to last week’s 1.46 point plunge, the market rocketed higher by 3.5 points to finish the week up 0.15%. (#sarcasm alert). Financials continued to lead the charge the last week, and remain extremely overbought. Profit taking remains highly recommended. Small and Mid-cap stocks, Energy, Materials, and Industrials outperformed the index as well. The problem, as stated above, is that a stronger dollar and higher interest rates will likely hamper this optimism sooner rather than later. This is particularly the case with Small and Mid-Cap companies that are the most susceptible to monetary tightening.

(Note: I have changed the sector and major market analysis charts to a 50/200 DMA crossover signal and embedded an overbought/sold indicator.)

The table below shows thoughts on specific actions related to the current market environment. (These are not recommendations, just ideas related to market extremes and contrarian positioning within portfolios. Use at your own risk and peril.)

Over the last couple of weeks, as suggested, we have continued to hedge our long-equity positions with deeply out-of-favor sectors of the market (Bonds, REIT’s, Staples, Utilities) which paid off well during the volatility last week.

sector-actions

As I have been warning over the last couple of months, the stronger dollar and the rise in rates should not be dismissed.

Everything is currently pointing to this being a very late stage advance, so profit taking, hedging, and rebalancing is strongly advised.


THE REAL 401k PLAN MANAGER

The Real 401k Plan Manager - A Conservative Strategy For Long-Term Investors


401k-planmanager-121716

There are 4-steps to allocation changes based on 25% reduction increments. As noted in the chart above a 100% allocation level is equal to 60% stocks. I never advocate being 100% out of the market as it is far too difficult to reverse course when the market changes from a negative to a positive trend. Emotions keep us from taking the correct action.

401k-PlanManager-AllocationShift

Merry Christmas

With the last holiday-shortened trading week ahead, portfolio and hedge fund managers will likely continue to chase performance and “window dress" portfolios into the end of the year.

However, come the first quarter of the year, the risk of a correction to some degree is highly likely to reverse the extreme overbought condition of the market. Therefore, as I penned in last week’s missive, I continue to suggest using the current rally to clean up portfolios as detailed in previously.

Step 1) Clean Up Your Portfolio

  1. Tighten up stop-loss levels to current support levels for each position.

  2. Hedge portfolios against major market declines.

  3. Take profits in positions that have been big winners

  4. Sell laggards and losers

  5. Raise cash and rebalance portfolios to target weightings.

Step 2) Compare Your Portfolio Allocation To The Model Allocation.

  1. Determine areas requiring new or increased exposure.

  2. Determine how many shares need to be purchased to fill allocation requirements.

  3. Determine cash requirements to make purchases.

  4. Re-examine portfolio to rebalance and raise sufficient cash for requirements.

  5. Determine entry price levels for each new position.

  6. Determine “stop loss" levels for each position.

  7. Determine “sell/profit taking" levels for each position.

(Note: the primary rule of investing that should NEVER be broken is: “Never invest money without knowing where you are going to sell if you are wrong, and if you are right.")

Step 3) Have positions ready to execute accordingly given the proper market set up. In this case, we are looking for a correction to reduce the overbought condition of the market to allow for a better opportunity to rebalance equity risk.

The big risk in the near-term is when the markets come to grips with the rise in rates, simultaneously with a stronger dollar, which will quickly erode earnings in an already over-valued market. Pay attention.

If you need help after reading the alert; don’t hesitate to contact me.


Current 401-k Allocation Model

The 401k plan allocation plan below follows the K.I.S.S. principal. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)

401k-ModelTarget-071616

401k Choice Matching List

The list below shows sample 401k plan funds for each major category. In reality, the majority of funds all track their indices fairly closely. Therefore, if you don’t see your exact fund listed, look for a fund that is similar in nature.

401k-Selection-List

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