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 both broke multiple bottoms last week 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. We continue to recommend reducing holdings on any rally into the end of the year.
Industrials, Materials, Energy, Financials, Communications – As we have noted over the last several weeks:
“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 “relatively better” as “defensive” sectors. But “relative” is only a term meaning they aren’t losing as much. We were stopped out of our healthcare exposure last week on the break of the 200-dma. Real Estate and Utilities remain above their rising 200-dma and are oversold. 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 given their sensitivity to the U.S. economy. Sell on any rally.
Emerging and International Markets -As suspected, emerging markets failed to hold above the 50-dma again last week and continues along its entrenched downtrend. (Although, on a relative basis they are now outperforming the S&P 500 by not going down as much. This is not an argument for diversification.) 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. The global economic weakness is accelerating and is spreading to the U.S.
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. We were stopped out of our trading position on the cap-weighted S&P index last week.
Gold – Gold has continued to trend along a rising 50-dma but is currently very overbought. The better news is Gold finally broke back above its 200-dma. Look for a rally in stocks to cause gold to pull back enough to work off the overbought condition. A trading position can be added with stops moved up to $115.
Bonds – As we have been repeatedly suggesting since the beginning of the year, bonds would be the “GO TO” haven when “SAFETY” became a real concern. Look for a rally in the markets going into the new year which will likely pull some of the froth off of 10-year treasuries. Pullbacks to support should be bought. As we have stated over the last several months:
“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:
The market continued to go through a liquidation process last week as newsflow remained decidedly negative. We have been reducing equity exposure all year, but sell-offs like the last two weeks, with no counter-trend bounces, are difficult to navigate, to say the least.
Last week we were stopped out of our trading position in IVV and our position in Healthcare (XLV). With only our “core” equities currently remaining we will look to reduce equity exposure further on rallies into January. As noted above, the bullish trend, longer-term, remains intact, but the bearish backdrop continues to mount. We will continue to use rallies to liquidate equities, buy bonds, and raise cash.
It is not yet viable to short the broader market but, as we noted last week, that time is coming. However, shorting the market 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.
There is mounting evidence of short to intermediate-term risks 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.
