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:
Discretionary and Technology – Last week we said that after taking profits in Technology, look for a correction back to support. The same goes for discretionary holdings as well. After a brief push to all-time highs, these market leaders are extremely overbought and exhausted. Take some profits and watch for a short-term correction back to support. The trends for both remain very bullish right now, and the pullback provides an opportunity to rebalance sector holdings back to target weights.
Healthcare, Staples, and Utilities – After a massive run in Healthcare stocks, take some profits and look for a pullback to support to add additional exposure if warranted. Likewise, Staples have been part of the sector rotation flow following a long period of underperformance. A pullback to the 50-dma will provide a decent opportunity to add exposure if needed. Utilities also continue to perform well here as money continues to rotate into previously “hated” sectors. Look for a correction back to the 50-dma as well to add exposure.
Financial, Energy, Industrial, and Material Industrials and Materials continue to be weighed upon by the ebbs and flows of a trade war. Given the unpredictability of “White House” policy, we have remained out of the sector for the time being until some certainty returns. While the trend for Energy remains in place, we remain market weight holdings due to lack of relative performance. After a brief spurt in financials, look for a pullback to the 200-dma to add exposure. Our overriding concern for banks continues to be the decline of the “yield curve.”
Small-Cap and Mid Cap continue to perform well as of late. We noted two weeks ago, that after small and mid-caps broke out of a multi-top trading range, we needed a pull-back to add further exposure. After having previously added exposure to these markets, we will look to add to current holdings on a pullback to support which holds.
Emerging and International Markets were removed in January from portfolios on the basis that “trade wars” and “rising rates” were not good for these groups. With the addition of the “Turkey Crisis,” ongoing tariffs, and trade wars, there is simply no reason to add “drag” to a portfolio currently. Cash is outperforming emerging and international markets currently.
Dividends and Equal weight continue to hold their own and we continue to hold our allocations to these “core holdings.” We will overweight these positions on a pullback to support that does not violate that level.
Gold – Despite the hopes for a resurgence in Gold, any sign of life has yet to occur as the “fear” of a stock market correction has all but disappeared. We have had NO gold exposure in portfolios since 2013 as there is no reason to add a “drag” on portfolio performance by holding declining or under performing assets.
However, if you are still hanging onto Gold we have been consistently providing stop loss levels and sell points since May of this year. These points have continued to decline. With gold very oversold on a short-term basis, if you are still long the metal, your stop has been lowered from $117 three weeks ago, to $114 this week. A rally sale point has also declined from the previous level of $121 to $117.
Bonds – This past week, bonds rallied sharply as money looked for “safety” amid the concerns of a collapse in the Turkish Lira. The rally last week establishes a series of rising bottoms for bonds and we are close to registering a very important “BUY” signal for bonds. As noted previously, we remain out of trading positions currently but remain long “core” bond holdings mostly in floating rate and shorter duration exposure. However, if we register a confirmed “buy” signal we will add trading positions back into portfolios.
REIT’s keep bouncing off the 50-dma like clockwork. Despite rising rates, the sector has continued to catch a share of money flows and the entire backdrop is bullish for REIT’s. However, with the sector very overbought, take profits and rebalance back to weight and look for pullbacks to support to add exposure.
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 I noted two weeks ago, the market’s improvement allowed us the ability to further increase equity exposure in portfolios in anticipation of registering a confirmed buy signal. However, given that August and September are historically weak months for the market, we will remain a bit more cautious on the how and when we increase holdings in our models.
The cluster of support at the 50- and 100-dma remains in place which limits much of the downside risk currently. But the current pullback to previous support at 2800 will likely provide an opportunity to add further exposure and bring portfolios closer to target model weights.
We will be looking to take the following actions on the next opportunity in the market.
- New clients: Add 50% of target equity allocations.
- Equity Model: Increase equity holdings to full weights.
- Equity/ETF blended – increase equity holdings to full weight and overweight domestic ETF “core holdings” to offset lack of international exposure.
- ETF Model: Overweight core “domestic” indices to offset lack of international exposure. Overweight outperforming sectors to offset underweights in under performing sectors.
- Option-Wrapped Equity Model bring all position to target weights and add “collars” opportunistically.
Again, we are moving cautiously. There is mounting evidence of short to intermediate-term risk that we are very aware of. However, the trend of the market remains positive and we realize that short-term performance is just as important as long-term. It is always a challenge to marry both.
It is important to understand that when we add to our equity allocations, ALL purchases are initially “trades” that can, and will, be closed out quickly if they fail to work as anticipated. This is why we “step” into positions initially. Once a “trade” begins to work as anticipated, it is then brought to the appropriate portfolio weight and becomes a long-term investment. We will unwind these action either by reducing, selling, or hedging, if the market environment changes for the worse.
