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posted on 22 October 2017

Sector And Market Analysis 21 October 2017

Written by , Clarity Financial

Data Analysis Of The Market and Sectors For Traders

S&P 500 Tear Sheet

Performance Analysis

ETF Model Relative Performance Analysis

Sector & Market Analysis:

The bull market continues to be fueled by hopes that tax cuts and tax reform will lead to higher reported earnings for corporations. While it is true that tax cuts will improve earnings, whatever improvement is given is likely already priced into forward operating estimates over the next two years. With small caps and the Russell 2000 at the highest valuations since the “" crash, the risk of disappointment is elevated.

But that is a story for another day.

Currently, there is little concern for such matters as investors continued to pile into equities last week in anticipation of “tax cuts" by Christmas. As I noted on Friday, don’t be surprised if we see Dow 24,000 by the time “Santa visits Broad & Wall."

Technology, Industrials, and Materials - continued their charge again this past week as movement toward tax cuts boosted these sectors higher. These sectors are EXTREMELY overbought short-term. Taking some gains in is likely a good idea at this juncture, but remain weighted in these sectors for now.

Financials and Healthcare had stumbled a bit previously but regained their footing this past week as bank earnings came in and the Administration has agreed to bail out “ObamaCare" for at least 2-years (translated that means “forever" in Government speak). Trends remain bullish, but are overbought as is the market in general.

Energy as I stated over the last couple of weeks, had mustered a decent oversold bounce but the trends and backdrop remain sorely negative. As I penned previously:

“With oil prices struggling at $52/share, the current price move is largely done for now."

While the underlying technicals are beginning to improve, the sector must stay above the 50-dma while working off the extremely overbought condition that currently exists. A violation 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 remain 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." While Discretionary remains in a positive trend, Staples are showing significant weakness. Reduce exposure with the break of the 200-dma for now.

Utilities, as noted last week, were VERY oversold and the pop in interest rates following the announcement of the Trump Tax Plan led to a violation of the 50-dma. However, as stated last week, Utilities have picked up performance lately and are testing previous highs. Remain long the sector and move stops up to recent lows.

Small and Mid-Cap stocks have stalled over the last two weeks and remain extremely overbought. Stops should be moved up accordingly. As stated two weeks ago:

“The moves to new highs for both markets provides some impetus for the market’s push higher in the short-term."

We previously took some gains out of these sectors but remain long for now.

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.

NOTE: Correlation between all markets is extremely high. What goes up together also comes down together.

Gold - Last week, the precious metal failed to break back above the 50-dma. As money is chasing equities currently, and there is NO FEAR of a crash, gold has temporarily “lost its luster" as a safe haven. With the recent passage of budgets in both the House and Senate, the push to “tax reform" has gained a lot of steam over the last week. This makes gold a much less optimal investment at the moment. We continue to watch the commodity currently, but remain on the sidelines for now.

S&P Dividend Stocks, after adding some additional exposure recently the index broke out to new highs and continues to climb. We are holding our positions for now with stops moved up to recent lows. Take some profits and rebalance accordingly. Dividend stocks have gotten WAY ahead of themselves currently as the yield chase continues.

Bonds and REIT’s took a hit this week as “tax reform" moved forward and the expectations for higher inflation, wages, and economic growth pushed rates higher. While the economic benefit from tax reform is “WAY OVERSTATED," we will continue to add more exposure if rates push towards 2.5-2.6% 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:

No changes this past week.

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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