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:
As noted above, the consolidation continues. As earnings season comes to its conclusion, the market will turn its focus to the economic and geopolitical backdrop which has been less optimistic as of late. We remain invested but our caution levels remain elevated.
Discretionary, Technology, Healthcare, Financial, Industrial, and Material stocks led the charge last week as money rushed back into equities following the break out of the ongoing consolidation range over the last couple of months. The most heavily shorted stocks turned in the best performance, but despite the improvement in the “breadth” of the overall rally, volume declined.
Energy also picked up that pace after its recent stumble as oil prices recovered a little bit. While the sector is still performing well, keeping current allocations at market weight, there is still some concern with recent price action given the previous two tops. We continue to suggest harvesting some profits if you haven’t done so as it is possible we not done with the correction just yet, particularly if the dollar continues to strengthen.
Staples finally showed some signs of life last week as money rotated into the most beaten up, and heavily shorted, areas of the market. We want to see some follow through over the next week before increasing exposure to the sector, but we are getting much more interested.
Utilities continue to languish at this point and are deeply oversold. We remain out of the sector for now, and we need some confirmation of sustainability before adding exposure back into portfolios.
Small-Cap and Mid Cap continue to lead performance overall. After small caps broke out of a multi-top trading range, we now need a pull-back to add further exposure. Mid-cap stocks also followed through last week breaking out to all-time highs as well. Any pullback that doesn’t violate support will also provide a better opportunity to increase exposure. After a strong push over the last few weeks, rebalance back to core weightings and look for a more opportunistic entry point in the future.
Emerging and International Markets remain lackluster in terms of performance currently. We previously removed our holdings in these markets and remain domestically focused at the moment. We will continue to monitor performance for an opportunity if it presents itself. Emerging markets, in particular, continue to lag due to a rising dollar and weak economic growth globally. Industrialized International is performing better, but not by much. Remain domestically focused to reduce the drag on overall portfolio performance.
Dividends and Equal weight continue to hold their own and we continue to hold our allocations to these “core holdings.”
Gold as noted previously, gold failed to hold important support at the 200-dma. We currently do not have exposure to gold, we exited in 2013, and see no evidence to suggest a long-term holding opportunity is at hand. We previously suggested to “Take profits on positions, and lower your stop to last week’s bottom at $122.” Again, we see no reason currently to own gold in your portfolio. There is no “fear” in the financial markets currently to cause a flight to safety. There will come a time to own gold, and we will add it heavily to portfolios when such is the case.
Bonds and REITs – Bonds continue to hold there own and remain a flight to safety when things “blow up,” as we saw with Italy recently. This is WHY we own bonds. While “exuberance” has overtaken “risk” in the short-term, the longer-term problems clearly remain. We remain out of trading positions currently, but remain long “core” bond holdings mostly in floating rate and shorter duration exposure. REIT’s are much more interesting now with a break back above their 200-dma. With the sector back on a “buy signal” short-term we will look for an opportunity to add REIT’s back into our portfolios.
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:
The break out of the consolidation last week provides us with the ability to opportunistically step up our equity allocations across all models. As I noted several weeks ago, we increased exposure in all models when the market initially broke out above the 100-dma. With the breakout above consolidation last week, we will now look for an entry point to add to portfolios.
- New clients: Will will look to buy 50% of target equity allocations for new clients.
- Equity Model: We previously added 50% of target allocations. Those positions will be “dollar cost averaged” opportunistically. (By the way, this is the proper way to “dollar cost average.”)
- Equity/ETF blended models will be brought closer to target allocations. We will add to “core holdings” to replace international and emerging markets deletions.
- Option-Wrapped Equity Model will be brought closer to target allocations and collars implemented.
We will do this opportunistically and continue to work to minimize risk as much as possible. While market action has improved on a short-term basis, we remain very aware of the long-term risks associated with rising rates, excessive valuations and extended cycles.
The actions we are taking currently are simply to take advantage of the current bullish reversal. We will also unwind these positions either by reducing, selling, or hedging if the market environment changes for the worse.
