Written by Lance Roberts, Clarity Financial
Data Analysis Of The Market and Sectors For Traders
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.
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Sector Analysis
As I stated last week:
“The markets must significantly gain traction next week if a deeper correction is to be avoided for now.”
On Monday and Tuesday, the markets rocketed higher on a massive short-covering squeeze as disaster was avoided in the French elections and rumors about the “Trump Tax Cuts” announcement swirled. In the end, it was a big “nothing burger” and the markets retraced a smidgen of their early week gains through Friday.
With that being said, the overall back drop remains BULLISH for now. I do remain somewhat cautious on allocations currently given, as discussed at the start of this missive, the “weekly sell signal” alert remains intact currently and at a high level.
However, let me reiterate, I remain long-biased in portfolios currently, but am also maintaining fairly tight stop-loss levels as well as hedges currently. Although we did lighten up on those hedges two weeks ago.
Let’s get to the sector analysis. (See last Tuesday’s Technically Speaking post for a deeper analysis on each sector and index covered here.)
Despite the ongoing struggles with the “retail sector,” Discretionary stocks bounced off their 50-dma last week and surged higher to extreme overbought levels. Take some profits by rebalancing weights in portfolios but remain long the sector for now.
Technology, Industrials, and Materials sectors bounced last week as the “Trump Trade” swung back into action on the potential for “tax cuts.” However, this trade will likely come into trouble over the next couple of months as “anticipation” fails to turn into “reality.” Maintain model portfolio weights for now as the bullish trend remains positive, but raise stop levels.
Energy continues to struggle after breaking its 50-dma and 200-dma. While energy had a bit of a bounce, the bounce failed to hold and the sector continues to weaken along with oil prices. Energy has also triggered a major sector sell signal with the cross of the 50-dma below the 200-dma. Remain heavily underweight energy for the time being.
Financials recently broke its 50-dma and a failed rally last week at that level of resistance keeps investors underweight the sector for now.
Health Care, Utilities, and Staples continue to maintain strength but did weaken a bit as of late. As stated, we did trim back on some of these hedges against the “Trump Trade,” but they are still performing well currently to offset weakness in the broader market.
Small and Mid-Cap stocks found some “muster” last week on a short-covering rally following the French election. The question of sustainability of that strength will be answered this coming week. Continue to hold current positions (after recommending to take some profits recently) for now. A break of the multiple-bottom lows is now the “full stop.”
Emerging Markets, International, and Dividend Yielding Stocks also reversed recent weakness following the French election as shorts were forced to cover. Having already taken profits a few weeks ago, hold these sectors for now, but stop levels should be moved up to the recent bottoms.
Bonds and REIT’s – last week I recommended taking profits from these hedges as they had become extremely overbought. I stated then:
“If the broader markets can rally over the next week or two, simply due to a reflexive oversold condition, look for these sectors to pull back to provide a better entry point.”
This has been the case. Now we wait to see what happens next.
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 at the beginning of the year 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.
While the bullish trend is still positive, which keeps us allocated on the long side of the market, the weekly “sell signal” alert is not being dismissed.
However, the rally last week did shore up some of the short-term weakness in the market, and we are looking for a pullback to either support, or a breakout to new highs, for an opportunity to put some of the recently harvested cash back to work on the long side.
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. We continue to maintain very tight trailing stops as the mid to longer-term dynamics of the market continue to remain very unfavorable.
