Written by Lance Roberts, Clarity Financial
The “Tear Sheet” below is a “reference sheet” provide some historical context to markets, sectors, etc. and looking for deviations from historical extremes.
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Sector Analysis
As stated above, the short-term corrective process over the last few weeks has reversed SOME of the overbought conditions (see short-term chart above). However, longer-term dynamics still suggest maintaining a more cautious approach to risk-based allocations.
As suggested two weeks ago, the conditions present suggest a continued rally attempt over the next few days. However, up to this point, rally attempts have continued to fail which suggests risk currently to portfolio allocations. Therefore, I continue to suggest that any rally attempt continuing over the next few days of April should be faded until strength returns to the market.
Remain cautious currently as the “risk off” trade has continued to advance over the last week.
Technology, Industrial, Materials, and Discretionary sectors continue to struggle with their respective 50-day moving averages. While still trending positively, relative performance has weakened substantially for now.
Energy continues to struggle after breaking its 50-dma and broke its 200-dma two weeks. While energy had a bit of a bounce this week and is testing resistance at the 50-dma and the trend is materially weakening. While oil prices did hold the critical support level of $48, supplies are continuing to build which suggest the bounce may be transient. Caution in this sector remains highly advised until the technical backdrop improves.
Financials have broken their 50-dma, tested the underside of that average and failed as I suggested might be the case last week. Underweight the sector for now.
As I stated a month ago:
“Utilities, Healthcare, and Staples had their respective 50-dma cross back above the 200-dma suggesting a much better buying opportunity on sector pullbacks in the future.”
We are now looking to add to our current holdings if a short-term “buy signal” is registered for the broader market. Such has not happened as of yet.
Small and Mid-Cap stocks continued to weaken in terms of relative performance and are breaking their respective 50-dma’s. The deterioration of relative strength continues to suggest caution.
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 three weeks ago and performance has continued to improve this past week. If the broad markets run into further trouble look for a continued rotation in the “safety trade.” However, bonds are now very overbought so taking some profits and waiting for a correction to add further exposure makes sense.
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 16-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 is IMPROVING on a TACTICAL (very short-term) BASIS.
As noted above:
“Portfolios remain bullishly allocated for now but with a cautious underpinning. We are still maintaining hedges until the current corrective action completes. Furthermore, we are currently maintaining ‘new money’ in short-term cash positions and only selectively stepping into core long-term holdings with tight stop-loss levels.”
If a buy signal is registered in the next week, I will adjust equity allocations in portfolios accordingly. However, we continue to maintain very tight trailing stops as the mid to longer-term dynamics of the market continue to remain very unfavorable.
