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posted on 08 October 2017

Market And Sector Analysis 07 October 2017

Written by , Clarity Financial

Data Analysis Of The Market and Sectors For Traders

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S&P 500 Tear Sheet

Performance Analysis

ETF Model Relative Performance Analysis

Sector & Market Analysis:

Let’s take a look at the sector breakdown.

Technology, Health Care, Industrials, Materials, and Financials - continued to lead this past week. With these sectors now back to very overbought levels in the short-term, some profit taking is advised. The big advance in Industrials and Materials is the revival of the “Trump Trade" on hopes of tax reform and infrastructure spending. Both of these areas are at risk of disappointment from D.C. - take some money off the table.

Energy, as noted over the last four weeks, has mustered a decent bounce but the trends and backdrop remain sorely negative. The pop in oil prices to $52/share is likely largely done as the underlying fundamentals for the sector remain weak. While the underlying technicals are beginning to improve, the sector must stay above the 50-dma. A violation next week will likely return the sector back to it previous downtrend. We continue to remain out of the sector entirely currently, but if the recent improvement can reverse the negative trends we will add weight to portfolios.

Discretionary and Staples have been under pressure as the consumer weakness continues to spread through the underlying companies. That story is a macroeconomic story that is being ignored by the rest of the market currently, however, it will eventually be the “tail that wags to dog."

Utilities are once again VERY oversold but the pop in interest rates following the announcement of the Trump Tax Plan led to a violation of the 50-dma. Stops should be moved up to $51 and any violation of the 200-dma should be watched closely.

Small and Mid-Cap stocks continued strong advance from last week. With both indices back to extreme overbought levels, stops should be moved up accordingly. The moves to new highs for both markets provides some impetus for the market’s push higher in the short-term. We are taking profits in both of these sectors as they are now pushing 4-standard deviation extremes of the moving averages.

Emerging Markets and International Stocks continue to hold support and money has been chasing performance in these sectors as of late. Remain long these sectors for now.

Gold - as feared, Gold has begun to reverse the recent breakout as the “fear trade" has all but dissipated. We will continue to watch for technical strength to support adding exposure to portfolios. For now, we remain on the sidelines.

S&P Dividend Stocks, after adding some additional exposure recently the index broke out to new highs. We are holding our positions for now with stops moved up to recent lows. Take some profits and rebalance accordingly.

Bonds and REIT’s finally had some profit taking hit these positions last week on the “risk" rotation. As stated last week:

“REIT’s are looking to break out of a long consolidation cycle and bonds remain favorable. Continue holding current positions for now but we are looking to take some profits and rebalance holdings."

We did take profits in bonds and began more aggressive buying in bonds late this past week. We will continue to add more exposure if rates push towards 2.5% which is our target for this reversal.

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:

The breakout of small and mid-cap stocks over the last three weeks supports the ongoing bullish trend of the market. As noted above, this trend keeps our portfolios allocated toward equity risk. We remain cautious of potential corrections giving the length of time the markets have been absent one, but there is no use fighting the excessively bullish sentiment for now. The break of the market above 2500 allowed us to allocate some capital in new accounts toward equity-related risk.

Also, as noted, we used the pop in interest rates to move cash management accounts, and larger cash holdings, into our cash allocation strategy providing for better yields. We also added some new bond exposure to accounts and are looking for additional opportunities if rates push higher over the next couple of weeks.

We remain extremely vigilant of the risk that we are undertaking by chasing markets at such extended levels, but our job is to make money as opportunities present themselves. Importantly, 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.

As always, we remain invested but are becoming highly concerned about the underlying risk. Our main goal remains capital preservation.

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