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:
With the “sell signal” firmly in place on a short-term basis, the selling pressure has continued to suppress a rally in the market. Well, that and the ongoing imaginary “trade war” between Trump and China. The expected rally last week ended abruptly on Friday but there was some improvement made.
Discretionary, Technology, Industrials, and Financials all of these sectors have continued to remain below their respective 50-dma’s. Furthermore, these sectors, while improving and holding relative support levels, are NOT oversold currently which provides enough room for a test of their respective 200-dma’s over the next couple of weeks. As I noted two weeks ago, it was a reasonable idea to take profits and reduce weightings accordingly.
Health Care, Materials, and Energy – we were stopped out of our small additional Energy trade with the previous break below the 200-dma, and continue to recommend under-weighting the sector for now. The push higher in oil prices looks to have ended as the “hurricane” related boost fades. We also closed out our Materials and Industrials trade on “tariff” risks. Health Care has now also broken the 200-dma suggesting reducing weights there as well.
Staples – our stop level was triggered on Staples and we will be eliminating exposure to the sector on this rally. The sector triggered a moving average crossover which will further pressure prices lower.
Utilities have significantly picked up performance in recent weeks and have broken back above the 50-dma. We are not recommending adding to the position yet as the moving-average crossover remains negative. However, we continue to hold our current weights as a hedge against the broader market. Stops have been moved up to the 50-dma.
Small Cap, Mid Cap, Emerging Markets, International, Equal Weight, and Dividend indices all broke back down through their 50-dma with international stocks testing its 200-dma. Three weeks ago, we removed international and emerging market exposure due to the likely impact to economic growth from “tariffs” on those markets. That reduction helped hedge risk this past week. Dividends and Equal weight continue to hold their 200-dma and performed better than the S&P index as a whole as money rotated to Utilities in the “flight to safety” rotation.
Gold continues its volatile back-and-forth trade but remains confined to a downtrend currently. As of this past week, Gold failed a test of recent highs. We currently do not have exposure to gold, but if you are already long the metal, we previously recommended that while the backdrop overall remains bullish, the correctional phase continues so taking profits on rallies remains prudent.
Bonds and REITs over the last three of weeks, these two sectors looked to have bottomed and initiated early “buy” signals. Hold positions for now as interest rates have started to recognize the economic weakness that has shown up in the data as of late. Our heavier cash position and exposure to Bonds, REITs, Utilities have hedged overall market risk and volatility recently.
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:
As discussed in this week’s missive, there is still a reasonable expectation for a rally on any relief from the “trade war rhetoric.” While we continue to honor the current “bullish trend,” we are also well aware of the rising risks and continue to look for an opportunity to derisk and re-hedge portfolios in the near future. As noted above:
“Our heavier cash position and exposure to Bonds, REITs, Utilities have hedged overall market risk and volatility recently.”
If the market repairs all of the technical damage and re-establishes the previous bullish trend, we will reallocate accordingly and increase equity exposure back to target levels. Our bigger concern, currently, remains the relative risk to capital if the 9-year old bull market. If the current correction expands into a more meaningful reversionary process, we will become much more aggressively risk adverse. As I noted in the main body of this missive, there is plenty of evidence to support the latter case.
We will continue giving the market a bit more “running room” this coming week, but we are “tightening up on the reigns” in terms of overall risk tolerance. As always, we prefer the market to “tell us” what it wants to do versus us “guessing” at it. “Guessing” generally never works out as well as planned.
It is crucially important the market maintains support at current levels and rallies next week. After having reduced exposure to “tariff” related areas a couple of weeks ago (materials, emerging and international markets), and again, we will use any rally in the next week or so to further reduce equity risk exposure in portfolios.
We remain keenly aware of the intermediate “sell signal“ which has now been “confirmed” by the recent market breakdown. We will continue to take actions to hedge risks and protect capital until those signals are reversed.
