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posted on 05 February 2018

Market And Sector Analysis 03February 2018

Written by , Clarity Financial

Data Analysis Of The Market and Sectors For Traders


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Sector & Market Analysis:

Well, that escalated quickly.

Last week I wrote:

“This is just getting a bit TOO extreme. 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."

The reversal came this past week.

Every Sector was in sell-off mode last week, in particular on Friday, as money left the markets entirely. Basic Materials, Energy, and Staples all broke their 50-dma, while Healthcare, Financials, Discretionary, Technology, and Industrials are still heading towards it.

While it is VERY likely we will get a counter-trend bounce next week, there is still likely more selling to come as we head into February. The question is whether current bullish trends will hold, or not? I suspect they will, for now, which will keep portfolios primarily allocated to the long-side. However, we will monitor and adjust holdings accordingly.

Utilities, we remain long the sector for now but are re-evaluating our holdings with the recent break in support. With the sector very oversold, we are likely going to see a bounce in the days ahead so we will reconsider our holdings and sell into strength if we don’t see improvement in short order.

Small and Mid-Cap index We hare repeatedly suggesting taking profits and rebalancing to portfolio weights in recent months. The sell-off last week explains why. While markets all remain positively trending currently, risk is rising that something more may be on the horizon. Use any bounce next week to rebalance holdings and raise stops if you have not already.

Emerging Markets and International Stocks As noted above, rebalancing portfolio weights and reducing some risk is prudent here as well. Trends remain positive, but there is risk of a bigger correction on the horizon so a bit of risk management remains prudent.

Gold - we have been on the lookout for a pullback in the overbought condition of gold to add it to portfolios. We may be getting that opportunity. A pullback to support at the 50-dma should provide a good opportunity to add a trading position to the metal. We will keep you apprised.

S&P Equal Weight & Dividend Stocks - Dividend stocks are flirting with support, but are now back to oversold conditions. After a hefty rise, we will look to trim back positions on a rally in the next week.

Bonds and REIT’s - We remain long these sectors currently, but they are both testing our long-term stop loss levels. With rates GROSSLY extended, as noted in the main missive above, we will look for a rally to re-evaluate our holdings. We still expect interest rate sensitive holdings to be important during a “risk off" rotation, although that wasn’t the case this past week. Our conviction on these positions continues, but we are still honoring our longer-term stop-loss levels and will exit accordingly if needed.

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.)

I am republishing last week’s table to as we had recommended reducing positions across the board due to the sharp ramp in asset prices.

Currently, HOLD, all positions until we get a better understanding of the current correction as noted above. I will update strategy and actions on Tuesday.

Portfolio Update:

Over the last several weeks, we have repeatedly noted the near parabolic rise in the markets and the addition of hedges being added to our portfolios. As noted in the main body of this weekly missive, we shouldn’t make rapid, emotionally based, decisions based on an initial correction.

It is what the market does “next" which will determine our next course of actions.

As far as portfolios go, we continue to maintain our current positions.

  • We have taken profits in some of our positions that were most grossly extended.
  • We added a short S&P 500 position which is currently working.
  • Interest rates, in the very short-term, are not cooperating with our interest rates sensitive exposure and we are monitoring those positions very closely for our next actions.

Currently, everything remains within our longer-term tolerance bands for risk controls. While corrections certainly do not “feel" good, it is important we don’t let short-term pickups in volatility derail longer-term investment strategies.

While positions are certainly under-pressure currently, we are monitoring them closely. We do not recommend making wholesale changes to investments based on a minor market correction which remains well confined to a long-term bullish trend. We are highly concerned about the underlying risk and remain focused on capital controls.

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