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:
Sector-by-Sector
Discretionary and Technology sectors are both testing multiple bottoms currently within a defined downtrend. After having removed all of our excess holdings in these sectors earlier this year, there is no reason currently to take on additional exposure. Reduce holdings on any rally into the end of the year.
Industrials, Materials, Energy, Financials, Communications – we are currently out of all of these sectors as the technical backdrop is much more bearish. With all of these sectors below their respective 50- and 200-dma’s, the downside pressure remains on for these sectors for now particularly as Industrials and Energy have broken recent bottoms to new lows for the year. The ongoing “trade war” and flattening yield curve continues to weigh on the outlook for these sectors. Continue to reduce weightings markedly on rallies.
Real Estate, Staples, Healthcare, and Utilities continue to be bright spots as “defensive” sectors. However, Staples and Healthcare have recently been hit with a bout of profit taking pushing both below their 50-dma. Real Estate and Utilities remain strong and are overbought currently. We continue to remain long staples and healthcare specifically but we are watching them closely. With trends still positive a trading opportunity may be presenting itself but we need to see the whole market “get its act together” next week.
Small-Cap and Mid Cap – both of these markets are currently on macro-sell signals and have broken to new lows for the year. We closed out our holdings in these sectors earlier this year but with both of these markets oversold look for a rally next week to sell into.
Emerging and International Markets -As suspected, emerging markets failed to hold above the 50-dma again last week and continues along its entrenched downtrend. International markets still look terrible and no improvement is being made there either with the index breaking to new lows last week. With major sell signals in place currently, there is still no compelling reason to add either of these markets to portfolios at this time.
Dividends, Market, and Equal Weight – Not surprisingly, given the rotation to “defensive” positioning in the market, dividend-based S&P Index continues to outperform other weighting structures. All three sold off last week as downward pressure was broad-based across all sectors. The overall market dynamic remains negative for now and important supports are being tested.
Gold – Gold has continued to trend along a rising 50-dma but is currently very overbought. If we get a rally in the markets next week, look for gold to retest support at the 50-dma. Such a retest will give traders an opportunity to add exposure with stops raised to $113.
Bonds – continued to outperform last week as a search for safety continues. Currently, bonds are very overbought which likely suggests a pullback is coming which would coincide with a rally in the stock market. However, such a pullback will likely provide a good buying opportunity as evidence of broader economic weakness continues to mount. We remain long our core bond holdings for capital preservation purposes and will look for a trading opportunity which does not violate the 200-dma.
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 noted previously, the overall market action remains troubling to say the least. The bullish trend, longer-term, remains intact for now, but the bearish backdrop continues to mount. We continue to sit on our hands with current positions and overweights in both cash and fixed income.
Last week, we took on a small trading position across models with an S&P 500 indexed ETF (IVV) in anticipation of an oversold rally into year-end. So far, it has not worked as planned and will be closed out next week on any rally heading into the Federal Reserve announcement on Thursday.
Despite all the volatility this year, the market is still within an overall consolidation pattern with Q1 lows still intact. Therefore, it is not yet viable to short the broader market. That time is coming, but shorting has capital risk just like being long. Given the recent uncertainty of the market, the best “hedge” remains cash for now.
While we expect a rally next week from short-term oversold conditions, we will remain on hold with any actions.
- New clients: We will continue to hold existing positions and sell “out of model” holdings on rallies.
- Equity Model: We will continue to hold current positions which are mostly 1/2 weights. Stops have been dramatically tightened up.
- Equity/ETF blended – Same as with the equity model.
- ETF Model: We will hold current holdings for now.
Again, we are moving cautiously. There is mounting evidence of short to intermediate-term risk of which we are very aware. However, with the market moving into the seasonally strong period of the year, we realize that short-term performance is just as important as the 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 actions either by reducing, selling, or hedging, if the market environment changes for the worse.
