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posted on 07 January 2018

Market And Sector Analysis 06 January 2018

Written by , Clarity Financial

Data Analysis Of The Market and Sectors For Traders


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S&P 500 Tear Sheet

Will return next week.


Performance Analysis

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ETF Model Relative Performance Analysis


Sector & Market Analysis:

As discussed above, the current market advance both looks, and feels, like the last leg of a market “melt up" as we previously witnessed at the end of 1999. How long it can last is anyone’s guess. However, importantly, it should be remembered that all good things do come to an end. Sometimes, those endings can be very disastrous to long-term investing objectives. This is why focusing on “risk controls" in the short-term, and avoiding subsequent major draw-downs, the long-term returns tend to take care of themselves.

For now…the bulls remain clearly in control…and they are charging.

Every Sector Except Utilities - were in full-fledged party mode over the last week as the chase for new-year positioning took hold. The massive overbought conditions in discretionary, staples, materials and industrials need to be trimmed off. Financials and Health Care are extremely overbought as well. Look to rebalance risk next week on any showing of weakness.

Energy - as I noted in December, the positive backdrop developed in the energy sector on a technical basis. We added one-half of a tactical trading position to portfolios last month which has paid off well. However, that trade has gotten way over-extended so look to take profits on any weakness. We are moving up our stop-loss levels as well.

Utilities, we remain long the sector for now and added some weight to the sector as a hedge against a risk-off rotation. With the sector very oversold, look for a risk-off rotation before months end to see a pick-up in the sector.

Small and Mid-Cap stocks continued their post-tax reform rally. Trends are positive which keeps allocations in the markets but the extreme overbought conditions make adding exposure here riskier. Look for weakness to take profits and rebalance weights in portfolios.

Emerging Markets and International Stocks had shown some weakness temporarily heading into the end of the year. However, that was quickly reversed this past week as both surged higher. We remain long these markets for now but have moved up stops accordingly. Hold positions for now and look to rebalance on any weakness.

Gold - Gold had failed to hold above the 50-dma and sharply violated the 200-dma a couple of weeks as bullishness over the market erased concerns of the need for safety. Interestingly, despite the complete lack of “fear" in the market, gold surged higher over the last couple of weeks which kept the 50-dma crossing back below the 200-dma. With Gold once again extremely overbought, the surge higher, and technical improvement, has now put it back on our watch list for an addition to the portfolio.

S&P Equal Weight & Dividend Stocks - As noted previously, both of these positions have simply gone parabolic as money is chasing yield currently. We have moved up stops and are looking to take profits and rebalance accordingly.

Bonds and REIT’s - With“tax reform" being passed by the Senate, rates finally ticked up which punished bonds and REIT’s in the short-term. We remain long these sectors and did add to them recently on weakness as a hedge against a “risk off" rotation.

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:

Also, as noted above, and previously, we have now added hedges to our portfolios given the recent surge in the markets. We accomplished the following last Friday:

  • Rebalance to target portfolio weights all “overweight" positions
  • Add exposure to bonds, utilities and REIT’s bringing allocations up to portfolio weight or slightly overweight.
  • Add a tactical trade of a short S&P 500 position to hedge risk.
  • Move up stops on all positions to current support levels.

As noted, we added 1/2 of a tactical trading position in Energy four weeks ago after an improvement in performance and recent bullish change in the technical underpinnings.

We remain invested but are becoming highly concerned about the underlying risk. Our main goal remains capital preservation.

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