Written by Lance Roberts, 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:
Did Santa come early?
Discretionary, Staples, Industrials, and Financials surged last week on advances of the tax bill. The near parabolic move is dangerous. These sectors are now GROSSLY extended. Take some profits, rebalance holdings and move stops up to recent breakout levels.
Technology has lagged over the past few weeks, but remains near highs. It appears Technology may have begun a consolidation or topping process. We will need to wait to see how the current price action resolves itself before taking action within the sector.
Healthcare as I noted previously, the sector had slipped below its 50-day moving average, however, the “buy everything” mode of the market over the last week resolved that situation keeping health care on hold in portfolios for now. Move stops up to the 50-dma for now.
Energy – as I noted previously, the energy sector had gotten trapped between the 50 and 200-dma. The positive backdrop, however, was the 50-dma having crossed above the 200-dma. I have noted over the last couple of weeks we were looking for a tactical trading entry point. We achieved that this week with the bounce of the 50-dma. We are adding one-half of a tactical trading position to portfolios next week.
Utilities, we remain long the sector and have moved stops up to the 50-dma. Trends remain positive and interest rates have likely peaked for the current advance.
Small and Mid-Cap stocks along with the broader index struggled earlier this week on tax-reform concerns but rebounded at the end of the week. Trends are positive which keeps allocations on hold but are too grossly extended currently to add positions. Look for a correction to support to add weighting.
Emerging Markets and International Stocks have shown some weakness as of late in terms of momentum, but remain in a bullish trend overall. We remain long these markets for now but have moved up stops accordingly.
Gold – Gold failed to hold above the 50-dma last week and sharply violated the 200-dma this past week as bullishness over the market erased concerns of the need for safety. Importantly, with no catalyst to put “fear” into the market, the 50-dma starting to weaken putting the current risk back to the downside. We continue to watch the commodity currently, but remain on the sidelines for now.
S&P Equal Weight & Dividend Stocks – In our “core portfolios” we carry an equal weighting of both the S&P 500 dividend index and the S&P 500 equal-weight index. This balance gives us historically better performance, lower volatility and a higher yield than just carrying the S&P 500 index. However, both of these positions have simply gone parabolic as money is chasing yield currently. We are taking profits and rebalancing accordingly.
Bonds and REIT’s – With“tax reform” being passed by the Senate, rates did tick up last week slightly. However, given the makeup of the tax bill, the realization that this current iteration will not create surging inflation, growth and interest rates is becoming more apparent. The bullish trend in Bonds and REIT’s continues so we will continue looking for pullbacks to add additional exposure.
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 market continued to hold its bullish trend this past week despite a pickup in volatility. This type of market is extremely dangerous as when markets break, and then immediately rebound, it lulls investors into a high degree of complacency that stocks “simply can’t go down.” While we are in the seasonally strong period of the year, we remain cognizant of the underlying risk.
Furthermore, as noted above, I stated the following at the beginning of November:
“I am now looking to begin building ‘Short S&P 500 and Nasdaq’ positions into portfolios over the next few weeks as a hedge against a January decline as noted above. I will keep you advised as to changes in portfolios ahead if my expectations begin to come to fruition.”
I am looking for the right “set up” to implement that trade.
As noted, we are also adding 1/2 of a tactical trading position in Energy after an improvement in performance and recent bullish change in the technical underpinnings.
As the Senate and House tax bills enter “conference,” I think we will get a much better picture of the likelihood of passage and what it will actually look like. There is a rather high degree of risk that stocks will sell-off following any passage of a “tax reform” bill as much of the benefit has already been priced into the market. In other words, there is a much higher probability of “disappointment” rather than “surprise” at this juncture.
As always, we remain invested but are becoming highly concerned about the underlying risk. Our main goal remains capital preservation.
