This week I was over at the Nasdaq in Times Square discussing the current market environment with Frances Horodelski on Canada’s Business News Network. The weight of the evidence is suggesting a cautious stance up here after all of our upside targets have been hit in recent weeks. Remember, we’ve been bullish stocks, globally since late January, and in the U.S. since early February. When our upside objectives are hit, it’s time to reevaluate. That’s what we’re doing now. [Read more…]
In this week’s members-only letter we discuss the following topics:
- What Do We Do With The U.S. Indexes Now? S&P500, DJIA, etc
- The Best Trade In Precious Metals: Gold & Silver
- About That Squeeze Higher in Chinese Stocks
- My Favorite Energy Trade Today
- What Are We Going To Do About This Messy Bond Market?
- The Best Tech Stocks: Apple, Microsoft, Google or Facebook?
- What Does The Weight-Of-The-Evidence Suggest About Risk-Appetite?
You guys know that I prefer to incorporate more of a weight-of-the-evidence approach to markets rather than basing my decision making on a single indicator. We look at stock markets all over the world to find themes, both bullish and bearish, and then take advantage of them within U.S. markets. I then take a similar approach and go sector by sector in the U.S., including a series of sub-sectors, to break it down even further and find themes within the U.S. As you guys well know, the reason we were bullish since January was because of the weight-of-the-evidence internationally, not because of what we saw in the S&P500 or Dow Jones Industrial Average. [Read more…]
This week I was driving home and flipping through radio stations on Satellite and I stopped to listen in on what was happening on the financial tv networks. I just learned this week that financial tv networks air their tv stuff on the radio too. Fun fact. Anyway, the topic was about Amazon earnings and how bad tech companies are doing. Not sure what Amazon has to do with technology? This was a stock market show. Amazon is a Consumer Discretionary stock. It’s actually the largest component of the Consumer Discretionary sector and is not even listed in the Technology Sector Index. Still, on and on they went about Amazon being a technology company. It made no sense.
Guys, I get it. We can sit here all day talking about what great technology Amazon has, and AWS is so great, etc etc. Yes, I know. But we’re talking about the stock market here, are we not? [Read more…]
We have to trade and invest in the market that we have in front of us, not the one that we want. Therefore we have to be able to approach the market from a completely unbiased perspective. We don’t care if the market doubles in price or if it gets cut in half. We want to try to take advantage of moves in both directions. This is America after all.
I know it’s not sexy, but since October 23rd, we have wanted to approach the major U.S. stock market averages from a more neutral perspective. This is the day that both the S&P500 and the Dow Jones Industrial Average first got above what was then, and still is, a flat 200 day simple moving average. Securities in that sort of environment create headaches, for both the bulls and the bears. The reason is because [Read more…]
Wednesday morning I was down at the Nasdaq chatting with Frances Horodelski from Business News Network. The mean reversion trade in Energy worked out nicely since last time I was on BNN in March. But at this point I think the easy money has been made there and money appears to be rotating into the Agribusiness sector. We discuss how to take advantage of this as well as the US Stock Market as a group and the weakening US Dollar.
Here is the full interview:
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One of the exercises that I find really valuable is comparing the relative performance of each of the S&P sectors to each other. Today we are breaking down 3-year daily line charts of each sector vs the S&P500. I also include a 200-day simple moving average to not only help define the trend, but also to see where prices are compared to the long-term smoothing mechanism.
The next two: Staples and Utilities look like bearish to bullish reversals. These were previously in downtrends relative to the S&P500 but now appear to be turning up and trading above upward-sloping 200 days:
Financials are just kind of there. The lack of trend tells us that they are trading with the market and are right near the mean. So not much to do here, although I would argue that they look better than the previous two above.
The last three are easily the worst of the bunch: Energy, Materials and Telecom. Each of them on a relative basis are well below downward sloping 200 day moving averages and other than perhaps a brief mean reversion, the trends here are still down. I would not trust these at this point to maintain a sustainable rally relative to the S&P500:
I like to do this periodically to get a good perspective on where money is flowing. I don’t really care what the sell side thinks in terms of over-weighting and under-weighting sectors. To me, price is what pays and the trends here (or lack there of) can be seen very clearly in the charts above. That’s enough as far as I’m concerned.
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With the S&P500 stuck right in the middle between important support and resistance levels, I think right now is probably best to remain neutral towards US equities from a tactical perspective. One of the ways we take advantage of what I think is going to be a lack of trend over the next 6-8 weeks is to put on pair trades that can add to the bottom line while maintaining a neutral stance in the asset class.
I figured now would be as good of a time as any to go over the relative strength for each of the S&P sectors. Here are the SPDR ETFs using 4-year line charts and a 200 day moving average to help define the trends. I kept them very clean and simple so we can really focus on just price and trends.
The first three charts: Materials, Energy and Technology appear to be going through bearish to bullish reversals. Materials look to be just breaking out while Tech is already more mature in this reversing process. Energy is somewhere in the middle. But on a relative basis, these 3 looks great. Materials are my favorite.
Materials vs S&P500:
Energy vs S&P500
Technology vs S&P500:
Financials have been underperforming the S&P500 consistently for over a year. This isn’t a good thing for the overall stock market as Financials are one of the more important sectors where we look for leadership. The fact that they’ve been lagging is, in my opinion, an unsustainable divergence. Something’s gotta give, either S&Ps come down and correct, or financials pick up the pace. Unfortunately there is zero evidence of financials starting to outperform, at least not yet.
Financials vs S&P500:
Consumer Staples are another problem child of this market as they have also been underperforming for over a year. This isn’t somewhere we want to be overweight. I would wait for a bottoming process (maybe similar to materials) before getting more optimistic about this space.
Staples vs S&P500:
The next two are former leadership groups that have gotten hit hard on a relative basis. Both Industrials and Consumer Discretionaries were darlings of the 2013 rally. But recently they’ve struggled; breaking trends and now allowing their 200 day moving averages to roll over. Structurally we prefer to stay more neutral in both of these areas, at least for now. I’m not sure they will keep declining, but I find it hard to believe they will emerge as new leaders any time soon.
Industrials vs S&P500:
Discretionaries vs S&P500:
Utilities are still a disaster relative to the S&P500 and I think more time is necessary if this is part of a bottoming process. I’m going to need to see more out of these guys before getting aggressively overweight this space. I’d stay away and just wait.
Utilities vs S&P500:
And finally healthcare. This one is still in a strong uptrend and there is little evidence that the bull run has ended. I would look for a break in this uptrend line and/or break of the 200 day moving average as warning signals for this group. But so far we haven’t seen that.
Healthcare vs S&P500:
I try to review each sector on a consistent basis looking at both the price charts and the relative strength. This helps us, not only keep a neutral positiion towards stocks, but also helps with idea generation and what stocks and sectors to focus my attention on. Right now, it’s the materials that stand out to me the most.
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