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:
On a very short-term basis, the market registered a trading “buy” signal. However, with the market still on longer-term “sell” signals, below important resistance and still contained in a downtrend, this rally should be used to raise cash rather than take on additional risk.
Discretionary, Technology, Industrials, and Financials rallied back toward their respective 50-dma’s last week. These sectors have continued to be the strongest sectors in the market so use the rally to rebalance sectors to portfolio weights but remain long for now. With earnings season starting, these sectors are the best positioned to benefit from positive surprises.
Health Care, Materials recovered after breaking their respective 200-dma’s. However, these sectors have lagged on a relative performance basis so remaining underweight these sectors currently remains prudent until performance improves.
Energy – after consolidating for over a month, energy stocks spurted higher last week as oil prices ramped up on prospects of an engagement with Syria. With oil now extremely overbought, and at levels which have repeatedly denoted peaks in prices, take profits in this sector and rebalance back to portfolio weight.
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, given the now overbought condition of the sector, and giving some room for earnings season, we raised cash by reducing holdings.
Small Cap, Mid Cap, and International indices all pushed back above their 50-dma last week. While the performance improved last week, be careful getting overly aggressive at this juncture. The setup for industrialized international stocks looks the best at the moment, but let’s wait and see how the market fairs next week before increasing weightings there.
Emerging Markets are still struggling. We previously removed our holdings in this sector and remain flat currently. We will continue to monitor performance for improvement.
Dividends and Equal weight continue to hold their 200-dma and performed better than the S&P index in recent weeks. We continue to hold our allocations to these “core holdings,” but are closely monitoring performance.
Gold continues its volatile back-and-forth trade but remains confined to a downtrend currently. As of this past week, Gold failed another 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. We are raising cash by reducing REIT’s to give some clearance to portfolios for earnings season, but will be quick to add back the exposure if performance improves. We continue to hold our bond positions for now as interest rates have started to recognize the economic weakness that has shown up in the data as of late.
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 we stated two weeks ago, the expectation for a rally has occurred and we are nearing our initial targets for additional risk reduction. While we continue to honor the current “bullish trend,” we remain very aware of the rising risks and continue to look for opportunities to derisk and re-hedge portfolios as “sell signals” remain firmly intact.
As we noted last week, our heavier cash position and exposure to Bonds, have hedged our risk so far, but with earnings season moving into full gear, we are removing REITs and Utilities to remove potential drag from performance temporarily. As I stated last week:
“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.”
The recent rally has been extremely week and lacked real conviction. However, 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 last week, there is plenty of evidence to support the latter case.
It is crucially important the market maintains support at current levels and continues to rally next week. After having reduced exposure to “tariff” related areas a couple of weeks ago (materials, emerging and international markets), we will continue to use any rally next week to continue to rebalance equity risk accordingly.
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.
