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:
Sector-by-Sector
Discretionary, Industrials, Materials, Staples, Energy, and Financials have all violated their 200-dma and failed to recover. Financials are particularly troubling given the decent fundamental backdrop for banks currently. These sectors are now in “sell rallies” mode until there is a resumption of a more bullish trend. We have been out of Industrials and Basic Materials since the beginning of this year, and had previously taken profits in Technology and Discretionary. Positioning should be reduced on rallies back to broken support levels for now until performance improves. With extreme oversold conditions a bounce is likely next week.
Real Estate, Healthcare, Staples, Utilities have held their 200-dma support during the recent rout. Healthcare has been under severe pressure after an outsized performance earlier this year. The trend remains positive and is currently oversold, so a rally would not be surprising. Money is rotating to Staples, Utilities, and Real Estate in a “risk off” rotation. Be careful with REIT’s as the “actual” real estate market is under a lot of pressure from higher rates. This will eventually filter through to REIT’s.
Small-Cap and Mid Cap – the breakdown in small and mid-cap stocks suggest a broader change to the overall market complexion. Last week, both markets rallied and failed at their 200-dma and then broke their respective lows last week. These positions have been stopped out as we discussed last week.
Emerging and International Markets this past week, both markets collapsed lower. There still remains, since we recommended selling in January of this year, no reason to be long these sectors. Despite repeated calls about the “cheapness” of the global markets, they are screaming global recession. Stay out of these sectors for now.
Dividends, Market, and Equal Weight – The overall market dynamic appears to have changed last week. With the markets deeply oversold short-term look for a rally to reduce risk, rebalance weightings in portfolios, and raise some cash.
Gold – as I noted two weeks ago:
“After repeated failures at the 50-dma, the metal finally found some life in the midst of the recent market meltdown. With Gold now extremely overbought short-term, use this rally to sell holdings if you are deeply underwater. From a trading perspective, IF, and this is a big if, Gold can hold the 50-dma on a pullback and turn higher, a rally to the 200-dma is feasible. Such would coincide with a much bigger sell-off in stocks.”
That was indeed the case this past week. Gold is now in a tradeable position. With gold VERY overbought short-term look for a counter-rotation in the markets next week (stocks up and gold down). As long as Gold can hold $114-115 and work off the overbought condition a tradeable entry will be presented. (Gold up / stocks down)
Bonds – rallied last week as money started searching for safety. However, the index is now testing the previously broken bottoms at $115. We are still out of trading positions currently, and if we get a rally in stocks next week, we will likely see a retest of recent lows on bonds. All trading positions are currently closed.
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 rally we were wanting to use to reduce risk into has failed to materialize outside of very large advances inside of a down day (Friday). As we said last week, such is not a good sign, and is something that has raised our overall “caution” levels markedly.
The market remains deeply oversold on a short-term basis and we continue to expect a rally this coming week in which we can reduce equity risk accordingly.
Please review the “Checklist Summary Of Actions To Take” in the main missive above. We will be applying this rules to our portfolios as well.
- New clients: We are holding OFF on-boarding into our portfolio models until a better risk/reward opportunity emerges.
- Equity Model: Multiple positions have violated stop-levels and will be sold on a rally next week.
- Equity/ETF blended – Same as with the equity model. Small and Mid-Caps were sold last week on absolute stop violations.
- ETF Model: Small and Mid-cap holdings were sold last week on absolute stop violations.
- Option-Wrapped Equity Model – If the market rallies back to previous resistance levels, we will add a long-dated S&P 5oo put option to portfolios to hedge risk.
As noted above in the main body of this missive, the violations of the market “this time” are markedly different than what we have seen previously. However, we do NOT want to panic if this is indeed just a correction within an ongoing bullish trend. The market HAS NOT violated the lows of February and earnings growth (while disappointing) is still growing. The pick up in volatility is certainly not enjoyable, but we don’t want to let our emotions get the better of our discipline.
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