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posted on 20 August 2017

Market And Sector Analysis 20 August 2017

Written by , Clarity Financial

Data Analysis Of The Market and Sectors For Traders

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Sector & Market Analysis:

This past week, as noted above, the markets lost ground as concerns over legislative agenda arose. With the S&P 500 having broken its election uptrend, and the 50-dma, concerns over the stability of the current bull market are rising.

Staples, Utilities, and Technology continued to perform better this week relative to the S&P 500 index itself and its other sector brethren. However, that outperformance is beginning to show signs of deterioration.

Industrials, Materials, Health Care, Financials, and Discretionary were weaker on a relative basis and broke their respective 50-day moving averages putting each sector on “alert" status. While bullish trends remain intact, those trends are coming under attack so it is important to tighten up stop levels, watch sector rotation and leadership changes.

Energy - That Didn’t Last Long. As I noted two weeks ago:

“Wait…WHAT IS THAT? Over the last few months, I have been discussing the declining trend of energy stocks due to the weakness in oil prices. With both extremely oversold, we finally saw a rash of short-covering this past week pushing both the commodity and energy sector higher.

It is still TOO early to institute positions in oil as we need to see oil prices stabilize above $48/bbl. Also, estimates for energy companies are being rapidly slashed for the rest of the year so we need to see stabilization there as well. However, with that said, energy is back on the radar for a potential entry point. Let’s give it another week and reassess our positioning next week."

Not only did oil prices not hold $48/bbl, energy stocks blasted to new lows. We continue to remain out of the sector entirely.

Small and Mid-Cap stocks both cratered this week. With these sectors now deeply oversold, we are looking for a failed bounce to exit positions and raise cash. The violation of monthly month support suggests more trouble ahead, but we will opportunistically look for a reasonable exit.

Emerging Markets and International Stocks as I noted several weeks ago:

“The bullish ‘buy point’ occurred which allowed us to add international exposure to portfolios. However, the subsequent explosion of these sectors higher reduces the opportunity somewhat until there is some correction to work off the excessive overbought condition."

The sell-off this week pulled these sectors back to support, however, they are not oversold on a short-term basis to maximize an entry point. We will watch next week for an opportunity to increase/add exposure to international markets to portfolios.

Gold - is once again trying to muster a rally from extremely oversold conditions. There is a good bit of work to do before this sector becomes interesting, but the move last week above the 200-dma does put the commodity back onto our radar for now. Gold is currently very overbought and trapped within a consolidation range marked by previous failures. We will watch for further developments next week.

S&P Dividend Stocks, after adding some additional exposure recently we are holding our positions for now with stops moved up to recent lows. The sell-off last week pushed the sector below its 50-dma but is currently holding support while having become oversold. We may be afforded an entry opportunity next week if the market firms up.

Bonds and REIT’s I noted previously:

“With inflationary pressures declining on every front, the most likely path for rates is lower. The drop in bond prices back to support can allow for adding bond exposure to portfolios if needed. Any push back towards 2.4% continues to be an ideal zone to add bonds and REIT’s to portfolios."

The push higher in rates did allow us to add bond exposure to portfolios. REIT’s, however, have not provided a good opportunity to add exposure despite holding onto support. We did take profits in bonds last week as they have become VERY overbought so we are looking for a reversal in rates soon, which will be subsequent with a short-term market rally, to add additional exposure to bonds and rebalance equity exposures accordingly.

Sector Recommendations:

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:

I have noted over the last few weeks that:

“The bullish trend remains positive, which keeps us allocated on the long side of the market for now. However, more and more ‘red flags’ are rising, as noted above with WARNINGS popping up across sectors and markets. While warnings are just that, a warning, it does suggest a bigger correction may be in the works over the next couple of months. Let’s pay close attention."

Those warnings are beginning to weigh on broader market performance which now has our portfolio monitoring on “full alert." It is critically important for the market to regain their footing next week and return back to the bullish trend. Any attempt that fails will lead to a reduction in equity allocation models and a further rebalancing of risk.

Last week, we took some profits in both bond related assets and in Utilities as overbought conditions became rather extreme due to the drop in interest rates. A bounce in the markets from current short-term oversold conditions should push rates marginally higher where we can look for our next opportunities on the fixed income side.

Stops have been raised to trailing support levels and we continue to look for ways to “de-risk" portfolios at this late stage of a bull market advance.

We remain invested but are becoming highly concerned about the underlying risk.

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