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posted on 08 May 2017

Market And Sector Analysis 06 May 2017

Written by , Clarity Financial

Data Analysis Of The Market & Sectors For Traders

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.

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

Sector Analysis

As I stated last week:

“With that being said, the overall backdrop remains BULLISH for now. I do remain somewhat cautious on allocations currently given, as discussed at the start of this missive, the “weekly sell signal" alert remains intact currently and at a high level.

However, let me reiterate, I remain long-biased in portfolios currently, but am also maintaining fairly tight stop-loss levels as well as hedges currently. Although we did lighten up on those hedges two weeks ago."

Before I get into the sector/index overview, I want to address two important issues: Oil and Interest Rates


I have noted in the sector review two week’s ago:

“The OPEC oil cut has likely run the majority of its course and with Permian Basin production on the rise, the pressure on oil prices from supply/demand imbalances remains an issue.

However, the recent test of $48/bbl support provides a support level currently, but a break of that level will likely see oil sliding back to the low 40’s. While energy-related earnings have helped the overall S&P 500 earnings rebound over the last quarter, it is likely transient and forward earnings estimates will likely have to be ratcheted down rather sharply for the rest of the year.

Currently, the energy sector remains in a negative trend and suggests a further decline in oil prices will likely lead the sector substantially lower. Importantly, while the sector is oversold enough for a bounce in the short-term, it is not unprecedented for the sector to remain oversold during a continued decline as the highlighted green area shows."

With oil now below support, $48/bbl becomes more formidable resistance. A failure to climb back above resistance next week will likely continue to press oil prices lower. However, on a short-term basis, energy stocks, as represented by $XLE, pushed into 3-standard deviations below the moving average last week. It is likely the reflexive rally could push the sector back towards $68 where positions can be reduced for now as the bullish trendline from 2016 has been broken.

Interest Rates

Several weeks ago I noted that we had lifted some of our interest rate sensitive portfolio hedges as interest rates hit our target of 2.2%. At that time we suggested rates could reverse back to 2.3-2.4%.

As of this past week, rates pushed toward 2.4% as expected and $TLT, our preferred proxy for buying and selling individual bonds, moved closer to our “buy level" of $120.

With bonds currently in between overbought and sold, no new positions are recommended currently and we are still maintaining our expectations of rates reaching the 2.4% range over the next month.

Let me be clear, I ultimately expect rates on the 10-year Treasury to reach 1.5%, or less, within the next 24-months which is why I continue to aggressively buy fixed income on opportunity. Over the next decade, based on current equity valuations, bonds will outperform stocks on a total return basis.

Okay, let’s get to the sector analysis. (See previous Tuesday’s Technically Speaking post for a deeper analysis on each sector and index covered here.)

Discretionary, Technology, Industrials, and Materials sectors continued their bullish trend but did exhibit some relative weakness after last week’s strong advance. Maintain model portfolio weights for now as the bullish trend remains positive, but raise stop levels.

Energy continues to struggle after breaking its 50-dma and 200-dma. While energy had a bit of a bounce on Friday, the trend remains sorely negative. Energy has also triggered a major sector sell signal with the cross of the 50-dma below the 200-dma. Remain heavily underweight energy for the time being.

Financials recently broke its 50-dma and a failed rally last week at that level of resistance keeps investors underweight the sector for now.

Health Care, Utilities, and Staples continue to maintain strength but did weaken a bit as of late. As stated, we did trim back on some of these hedges against the “Trump Trade," but they are still performing well currently so we are maintaining positions for now.

Small and Mid-Cap stocks lost steam last week with both flirting with the 50-dma’s after getting very overbought last week. As I noted last week:

“The question of sustainability of that strength will be answered this coming week. Continue to hold current positions (after recommending to take some profits recently) for now. A break of the multiple-bottom lows is now the ‘full stop.'"

The failure to maintain its strength from last week, puts support levels into close focus. Stops should be maintained as instructed last week.

Emerging Markets, International, and Dividend Yielding Stocks reversed recent weakness following the French election as shorts were forced to cover, however, Emerging Markets struggled a bit last week while developed countries continued to surge based on a Macron win in France. There is a good bit of risk built into international stocks currently, but after having already taken profits a few weeks ago, we continue to hold these sectors for now with stop levels moved up to the recent lows.

Bonds and REIT’s - a few weeks ago I recommended taking profits from these hedges as they had become extremely overbought. I stated then:

“If the broader markets can rally over the next week or two, simply due to a reflexive oversold condition, look for these sectors to pull back to provide a better entry point."

This has been the case. Now we wait to see what happens next. See analysis above.

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:

While the bullish trend remains positive, which keeps us allocated on the long side of the market, the weekly “sell signal" alert is not being dismissed.

However, the rally last week, and the breakout to new highs did shore up some of the short-term weakness in the market, and as noted last week:

“We are looking for a pullback to either support, or a breakout to new highs, for an opportunity to put some of the recently harvested cash back to work on the long side."

We will watch this breakout this coming week to see if it can hold and evaluate sustainability as we head into the seasonally weak summer period. If it holds, and shows some improvement, we will start allocating some of our reserves into our core holdings. We are also moving all stops up to current support levels.

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