Written by Lance Roberts, Clarity Financial
Data Analysis Of The Market and Sectors For Traders
S&P 500 Tear Sheet
Performance Analysis
ETF Model Relative Performance Analysis
Sector & Market Analysis:
One of the biggest problems for investors over the last 19-weeks has been the very rapid rotation between sectors and indices as money continues to chase performance. The high correlation between all sectors and markets is problematic when the next downturn begins as there will be relatively no “safe place” to hide.
Let’s take a look at the sector breakdown.
Technology, Health Care, Industrials, Materials, and Financials – continued to lead this past week. With these sectors now back to very overbought levels in the short-term, some profit taking is advised. The big advance in Industrials and Materials is the revival of the “Trump Trade” on hopes of tax reform and infrastructure spending. Both of these areas are at risk of disappointment from D.C. – take some money off the table.
Energy, as noted over the last three weeks, has mustered a decent bounce but the trends and backdrop remain sorely negative. The pop in oil prices to $52/share is likely largely done as the underlying fundamentals for the sector remain weak. While the underlying technicals are beginning to improve, bounces in the sector should still be used to reduce weak and underperforming positions. We continue to remain out of the sector entirely currently, but if the recent improvement can reverse the negative trends we will add weight to portfolios.
Discretionary and Staples have been under pressure as the consumer weakness continues to spread through the underlying companies. That story is a macroeconomic story that is being ignored by the rest of the market currently, however, it will eventually be the “tail that wags to dog.”
Utilities are once again VERY oversold but the pop in interest rates following the announcement of the Trump Tax Plan led to a violation of the 50-dma. Stops should be moved up to $51 and any violation of the 200-dma should be watched closely.
Small and Mid-Cap stocks continued their relative rotation pick up from last week. With both indices back to extreme overbought levels, stops should be moved up accordingly. The moves to new highs for both markets provides some impetus for the market’s push higher in the short-term.
Emerging Markets and International Stocks continue to hold support and money has been chasing performance in these sectors as of late. The recent calls to take profits in these sectors continues to remain prudent.
Gold – as feared, Gold has begun to reverse the recent breakout as the “fear trade” has all but dissipated. We will continue to watch for technical strength to support adding exposure to portfolios. For now, we remain on the sidelines.
S&P Dividend Stocks, after adding some additional exposure recently the index broke out to new highs. We are holding our positions for now with stops moved up to recent lows.
Bonds and REIT’s finally had some profit taking hit these positions last week on the “risk” rotation. As stated last week:
“REIT’s are looking to break out of a long consolidation cycle and bonds remain favorable. Continue holding current positions for now but we are looking to take some profits and rebalance holdings.”
We did take profits in bonds and are looking for the next opportunity to add more exposure on a further pullback that does not violate bullish trends.
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 breakout of small and mid-cap stocks over the last two weeks supports the ongoing bullish trend of the market. As noted above, this trend keeps our portfolios allocated toward equity risk. We remain cautious of potential corrections giving the length of time the markets have been absent one, but there is no use fighting the excessively bullish sentiment for now. The break of the market above 2500 allowed us to allocate some capital in new accounts toward equity-related risk.
Also, as noted, we used the pop in interest rates to move cash management accounts, and larger cash holdings into our cash allocation strategy providing for better yields. We also added some new bond exposure to accounts and are looking for additional opportunities if rates push higher over the next couple of weeks.
We remain extremely vigilant of the risk that we are undertaking by chasing markets at such extended levels, but our job is to make money as opportunities present themselves. Importantly, stops have been raised to trailing support levels and we continue to look for ways to “de-risk” portfolios at this late stage of a bull market advance.
As always, we remain invested but are becoming highly concerned about the underlying risk. Our main goal remains capital preservation.