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:
My comments from last week remain.
“Trade, tariffs, internet sales tax, and continued rhetoric from the ‘Tweeter-In-Chief’ roiled the markets last week, but every ‘dip’ was readily bought keeping bullish underpinnings intact for now.”
Discretionary stocks have been leaders previously, but as we stated two weeks ago, that sharp ramp higher was sustainable. We recommended, with the sector extremely overbought, taking profits and reducing back to portfolio model weights for now. Such remains prudent on any rally this coming week.
Technology, as noted last week, ran into a bit of trouble. We suggested taking profits and reducing portfolios back to target model weights as well. With the sector holding support at the 50-dma, a rally this next week will likely be a good opportunity to rebalance portfolio risk for now.
Healthcare, Staples, and Utilities have picked up performance recently as money has rotated towards very beaten up sectors in a sector rotation move. As noted last week, we need to see some further improvement before becoming more aggressively exposed to these sectors. We added Staples to our portfolios last week, but remain underweight these sectors for now.
Financial, Energy, Industrial, and Material stocks, after a brief spurt of excitement, have all slipped backward. While the trend for Energy remain in place, for now, we remain underweight holdings. We currently have no weighting in Industrial or Materials as the “trade war” continues to negatively impact the companies in the sectors. The decline of the “yield curve” is hurting major banks, while we are underweight the sector if performance doesn’t improve next week we are likely to be stopped out of holdings.
Small-Cap and Mid Cap continue to lead performance overall. We noted last week, that after small and mid-caps broke out of a multi-top trading range, we needed a pull-back to add further exposure. We recently added a small amount of small-cap exposure to portfolios and are maintaining tight stops for now. If the recent pullback to support holds, we will be able to increase exposure further.
Emerging and International Markets were removed in January from portfolios on the basis that “trade wars” and “rising rates” were not good for these groups. Furthermore, we noted that global economic growth was slowing which provided substantial risk. That recommendation to focus on domestic holdings in allocations has paid off well in recent months. With emerging markets and international markets continuing to languish, there is no reason to ad exposure at this time. Remain domestically focused to reduce the drag on overall portfolio performance.
Dividends and Equal weight continue to hold their own and we continue to hold our allocations to these “core holdings.”
Gold – we haven’t owned Gold since early 2013. However, as we stated several weeks ago:
“…we previously suggested to ‘Take profits on positions, and lower your stop to last week’s bottom at $122.’ Again, we see no reason currently to own gold in your portfolio, however, if you do, the $122 stop was violated and all precious metals positions should be closed out for now.”
With the 50-dma now back below the 200-dma there is still no reason to own gold currently. If you are long in the metal currently, gold is extremely oversold and a bounce is likely. Use that bounce to reduce holdings for now. There will come a time to own gold, and when there is, we will add it to portfolios. Now is not the time.
Bonds and REITs – Bonds have continued to improve performance despite a continued bullish backdrop to equities. These two things do not generally coincide for long periods, so either, the “bulls” are wrong on stocks or the “bears” are wrong on bonds. I would bet on the latter.
We remain out of trading positions currently, but remain long “core” bond holdings mostly in floating rate and shorter duration exposure. REIT’s are much more interesting now with a break back above their 200-dma. The sector is extremely overbought, so on a pullback that does violate support, we will add REIT’s back into our portfolios.
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/Client Update:
The failure of the market last week, kept our portfolio additions on hold. The cluster of support at the 50- and 100-dma remains in place and we are currently evaluating market conditions for small step ups in equity exposure to add to current holdings. Depending on how the market behaves next week, we are still looking to take the following actions across our portfolio models.
- New clients: Will will look to buy 50% of target equity allocations for new clients.
- Equity Model: We previously added 50% of target allocations. Those positions will be “dollar cost averaged” and 1/2 weight of new holdings will be added opportunistically.
- Equity/ETF blended models will be brought closer to target allocations. We will add to “core holdings” and add 1/2 weight to new holdings and bring existing holdings up to target model weights.
- Option-Wrapped Equity Model will be brought closer to target allocations and collars implemented.
Again, we are moving cautiously, and opportunistically, as we continue to work toward minimizing risk as much as possible. While market action has improved on a short-term basis, we remain very aware of the long-term risks associated with rising rates, excessive valuations and extended cycles.
It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these action either by reducing, selling, or hedging, if the market environment changes for the worse.