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posted on 15 January 2018

Market And Sector Analysis 13January 2018

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:

At the beginning of 2017, I penned the following:

The video below shows the historical “rotation" of sectors over the last 3-years. As you will notice sectors have consistently ‘swarmed’ in a clockwise rotation going from strongly outperforming the S&P 500 index to strongly underperforming. If you watch to the end of the video you will see the post-presidential election anomaly form."

I have notated on the Sector Rotation model below, the early stages of the reversion process of that extreme with Treasury’s and Financial’s beginning to trade momentum.

Of course, over the ensuing couple of months, the out-of-favor holdings had a sweeping rotation back to outperforming the S&P 500.

Well, here we are once again, and while not as dramatic of a deviation between outperforming sectors and underperforming, the same setup once again exists.

However, for now…the bulls remain clearly in control. So, this is not yet the time to be overwhelming “bearish" on the market.

But disregard the risk, either.

Take a look at the sectors below. Every sector is pushing 2- and 3-standard deviations of longer-term moving averages. This isn’t normal.

Every Sector Except Utilities and Staples - 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 as noted below, we recently added to mid-cap and international exposure on their respective breakouts. 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 as noted below, we added some international exposure on the breakout following the recent pullback. The markets are extremely overbought on every front, so, as with virtually every other position, rebalancing portfolio weights and reducing some risk is prudent.

Gold - We have monitored Gold for a long-time and currently still remain on the sidelines after exiting the position back in 2013. However, it is worth noting that Gold has been back on our radar for the last several months. However, as shown in the chart below, Gold appears to be bottoming here, but a series of lower highs keeps us cautious. With Gold back to very overbought levels, which have ends to previous runs, we will continue to look for an entry opportunity on a pullback that does NOT violate important support levels.

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 - We remain long these sectors and did add to them recently on weakness as a hedge against a “risk off" rotation. Our conviction on these positions continue to rise, but we are still honoring our longer-term stop-loss levels.

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 two weeks ago, hedges have been added to our portfolios given the recent surge in the markets.

  • Rebalanced positions to target portfolio weights
  • Added exposure to bonds, utilities and REIT’s bringing allocations up to portfolio weight.
  • Add a tactical trade of a short S&P 500 position to hedge risk.
  • Moved up stops on all positions to current support levels.

On our long side, we added a tactical trading position in Energy over a month ago. Our analyst, Jesse Colombo, also found two more good opportunities recently where we increased our exposure to Russell 2000 and Japan on recent breakouts.

While our hedges are taking a bit of a beating as of late, they are small relative to the long-side of our portfolio. As always, we remain fully invested but are becoming highly concerned about the underlying risk. Our main goal remains capital preservation which is why we are de-risking portfolios where and when we can.

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