Written by Lance Roberts, Clarity Financial
S&P 500 Tear Sheet
The “Tear Sheet” below is a “reference sheet” provide some historical context to markets, sectors, etc. and looking for deviations from historical extremes.
If you have any suggestions or additions you would like to see, send me an email.
Sector Analysis
Over the last couple of weeks, the market has begun a corrective process. Currently, the market is oversold enough on a daily basis, and holding support at the 50-dma, which suggests a rally attempt is likely next week.
However, any such rally attempt should be faded in the short-term as the market remains on a SELL signal currently, as shown at the bottom of the chart. Previously, when oversold conditions have coincided with a sell-signal, corrections have tended to continue until the 200-dma moving average was tested.
Given the current economic and fiscal policy backdrop, such a retest at this juncture would not be either surprising or unwarranted. Furthermore, such a corrective action would provide the relief necessary to potentially upgrade equity risk exposure in portfolios.
Remain cautious currently as the “risk off” trade has continued to advance over the last week.
Technology, Industrials, Discretionary, and Financials lost momentum last week. Continued profit taking in this sector remain prudent due to the extreme overbought conditions present.
Energy continues to struggle after breaking its 50-dma and HAS NOW broken its 200-dma. The big risk right now is a failure of oil prices (West Texas Intermediate Crude) to hold $48/bbl. A failure at that level will likely bring a lot more selling into the commodity putting further downward pressure on the energy sector. Heavily underweight exposure in the sector for the time being and sell-off weak positions that have performed poorly relative to the sector as a whole. The next leg down in energy and commodity prices is on the horizon which will likely coincide with a recessionary onset.
Utilities, Healthcare, and Staples just had their respective 50-dma cross back above the 200-dma suggesting a much better buying opportunity on sector pullbacks in the future. We will be looking to add to our current holdings on such an opportunity. In the short-term, take profits and rebalance weightings in portfolios after the recent advance as they are a bit ahead of themselves currently.
Small and Mid-Cap stocks continued to weaken in terms of relative performance and have broken their 50-dma. While they may get a bounce next week, a failure to recover their relative strength will suggest further weakness. Take profits and rebalance to portfolio weightings.
Emerging Markets, International, and Dividend Yield Stocks are again very overbought. The bull trend is still intact but some profit taking and rebalancing is advised.
Bonds and REIT’s got oversold last week and performance improved this past week. If the broad markets run into further trouble look for a continued rotation in the “safety trade.”
Overbought conditions exist almost unilaterally across the entire complex suggesting a higher risk/reward condition currently until a correction occurs. Due to this condition, we did rebalance portfolio weightings a month ago to raise some cash. As noted, we are not adding any new equity exposure currently for this reason. We are, however, actively buying individual bonds for 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 Update:
After hedging our long-equity positions 14-weeks ago with deeply out-of-favor sectors of the market (Bonds, REIT’s, Staples, Utilities, Health Care and Staples) we did rebalance some of our long-term CORE equity holdings back to original portfolio weightings harvesting a bit of liquidity.
The short-term bullish trend is still very positive which keeps us allocated on the long-side of the market. HOWEVER, the technical setup required for an increase in equity risk in portfolios currently is NOT FAVORABLE currently.
We continue to maintain very tight trailing stops as the mid to longer-term dynamics of the market continue to remain very unfavorable as well.
Rebalancing remains strongly advised.
