Financial Research
Technical Strategy
- Technical Strategy
Today, after 4 fortunate years, I am leaving Fundstrat Global Advisors to join RBC Wealth Management as their in-house technical analyst. Prior to Fundstrat, I had a 25-year career on the sell side with RBC Capital Markets so I am very excited to join the buy side of RBC where I have many long-term relationships throughout the firm. Fortunately, like you, I will also be a client of Fundstrat. Tom Lee and John Bai have built an impressive research business that is unique on the street. I am very grateful to them both for the opportunity to work with the Fundstrat team and I am looking forward to continuing our relationship while at RBC Wealth Management. More importantly, I want to thank YOU for your support at FSInsight. I hope my weekly notes and webinars we hosted have given you some technical tools and perspective to better manage your investments. Please connect with me on Twitter @rsluymer with any feedback. Turning to the markets, as I noted last week, I view last week’s lows to be an important line in the sand for markets and many stocks. My view has been since the beginning of the year that a pullback or pause would begin by late January/early February. However, after ‘only’ a -4.5% decline by the S&P 500 to its 50-day moving average and a -5.46% decline by the Russell 2000, equity markets have been rebounding all week. Tom Lee, as usual, made an excellent call early in the week noting that the surge in the VIX, followed by a historic 3-day decline, effectively ended the correction. Most stocks have rebounded nicely keeping their uptrends intact as defined by rising 50-day moving averages. In fact, with the Russell 2000 making new price and relative performance highs, many clients are understandably questioning my expectation for markets to remain choppy through Q1. Without a doubt there are many areas that are showing strong price and relative performance trends. I am not a big fan of technical clichés, but these trends are your friend, and investors should stay long strongly trending groups and stocks. However, one group I would encourage you to stay focused on in the coming weeks is the Semiconductors. I view Semis as one of the most important groups in the market as they often lead the broader market at turns and this week they have begun to lag and pullback. To be clear, I don’t view their recent pullback as a major problem for the market longer-term, but their recent divergence does reinforce my view sector rotation is likely to increase moving through Q1. Note that while the price of the SMH in the chart below has bounced back, the relative performance versus the S&P 500 has not kept up and is now challenging the prior low in January. I would view a break below that January relative performance low as confirmation leadership is beginning to churn and for more active investors to tighten risk control stops to those levels. Source: Fundstrat, FactSet Growth sectors, technology and consumer discretionary, remain range bound above their long-term uptrends and have yet to show evidence of breaking down as many have predicted. Following up on last week’s comment, Cyclical are continuing to show evidence of rebounding from their pullbacks that developed two weeks ago. Remain overweight for 2021 and expect further choppy trading well into Q1. Conversely, safety sectors are again stalling after bouncing back from oversold levels. Figure: Best and worst performance sectors over past 3 months
- Technical Strategy
Market Down But Not Out; Could Follow 2011 Similar Move
The S&P 500 index’s (SPX) historic decline last week sliced through most of the moving averages at the heart of technical analysis, with a break below the 200-week simple moving average at 2636 the most recent casualty. That four-year moving average is a proxy for the secular uptrend of the SPX seen during the bull markets in the 1950s-1960s, 1980s-1990s and 2009-2020. In other words, the break below the 200-week sma at 2636 raises the risk the recent equity sell-off has ended the secular bull-market. Of course, the 20% plus drop already herald’s the bear market’s arrival. While this week’s break below the 200-week is a major concern, particularly given the looming global economici slowdown, I believe it is premature to conclude the secular bull market is broken. Of course, I am concerned and not blindly ignoring the risk to equities, but I also believe there are two key technical points to consider before we can declare the secular bull market to be DOA. Is the secular uptrend broken with SPX below its 200-week sma or just dented? Source: FS Insight, Bloomberg First, the chart above illustrates the past three pullbacks to the 200-week sma since 2009. The cycle lows in 2016 and again in December of 2018 were almost textbook examples of a major cycle low developing at that key support level. The correction in 2011, however, could be what is developing today. It’s premature to make any definitive conclusions, but the low in 2011 undercut the 200-week sma by 5-6%, then traded in a very volatile range only to make a marginal new low a month later before recapturing 200-week sma on the upside. Additionally, the four-year cycle lows in late 1957, 1962 and 1966 spent many weeks in volatile ranges below 200-week sma before reaccelerating to the upside 1-3 months later. I would also note that Friday the SPX was near a cluster of key support levels starting with 2416 which is the important 61.8% Fibonacci retracement level of the 2016-2020 rally followed by the December 2018 lows at 2346. I can’t state for sure these levels will hold but it would be an important technical development to see the S&P begin to stabilize near current levels. Keep your eyes on that. Secondly, after peaking in early February, weekly momentum indicators continue to decline and are unlikely to signal an intermediate-term, tactical bottom until well into 2Q. I expect these should begin to bottom in late April-May, which coincides with markets better understanding the scope of Covid-19 and potential impact to earnings. Bottom line: My expectation is that the S&P is likely to begin to stabilize near the support levels outlined above followed by a very choppy trading well into 2Q similar to what developed in 2011 and during the cycle lows in the 1950s. Figure: Weekly Sector ReviewSource: FS Insight, Factset Figure: Best and worst performance sectors over past 3 months Source: FS Insight, Bloomberg
- Technical Strategy
Market Chop Can Provide Good Entry, Watching CAT
Yet another record making week – The bull market of the March 2020 crash has already notched a number of records that history students will study for years to come. This past week only added to the story with focus on retail investors rattling seasoned hedge fund professionals with eye-popping short squeezes. For those of you that were able to successfully trade these stocks, congratulations! For those of you with less appetite for those type of volatile trades, let’s stay focused on the bigger macro picture that is unfolding. Signs of a tactical Q1 peak developing but don’t overreact, the long-term cycle is intact. My technical view remains unchanged. Intermediate-term indicators, that track 1-2 quarter directional shifts in markets, are showing evidence of peaking and turning negative. What does this really mean to you as an investor? I’m expecting a more choppy, volatile trading range through Q1 that should create timely opportunities to increase portfolio exposure to cyclicals in Q2. Digging deeper, leadership beginning to churn -Markets ebb and flow. A pullback or pause should not be surprise in the coming weeks particularly after the rally we’ve seen in 2020. Stocks such as CAT, DE, and FCX, to mention just a few of the leading deep cyclicals, have pulled back on higher volume following almost linear rallies from their March lows. Similarly, semiconductors are beginning to pause while many lagging groups, from growth stocks to more defensive groups, are beginning to rebound following 3-5 month pullbacks. I view this group rotation as normal bull market behavior, similar to a relay race, with leadership passing from leading groups to lagging groups every few months. A multi-week, multi-month pause is healthy technical development that helps cool some of the overbought condition that has developed and should set the stage for another upside move to take hold later in Q1/early Q2. For the very short-term traders, look for another bounce early next week following 1-2 week pullbacks, many to trading support at 50-dma’s. Monitoring CAT as a barometer for leading cyclicals – CAT is one of the barometers I’m using to track the overall rebound in cyclicals. We’ve been bullish on CAT since the spring as part of our recommended bar bell exposure to both growth and cyclical stocks. The recent pullback is now oversold short-term as CAT tests its 50-day moving average just as it announces positive earnings. I’m expecting CAT to bounce from current levels which will make the recent lows at $179 as a demarcation line. As one proxy for the overall rebound in cyclicals, CAT above 179 is ‘good’ while a break below that level would signal to me we are seeing more evidence of a tactical peak developing in the market. Figure: Weekly Sector ReviewSource: FSInsight, FactSet Growth sectors, technology and consumer discretionary, remain range bound above their long-term uptrends and have yet to show evidence of breaking down as many have predicted. Following up on last week’s comment, Cyclical sectors pulled back the past week but are already showing signs of stabilizing short-term. Expect further choppy trading well into Q1. Similarly, safety sectors bounced back from oversold levels this week with Healthcare noteworthy as it begins to reverse its H2 2020 relative performance downtrend. Figure: Best and worst performance sectors over past 3 months
- Technical Strategy
As Leading Stocks Become Advanced, Homebuilders are Bottoming
Impressive price and breadth uptrends remain intact - The S&P 500 and Russell 2000 small-cap indices made new all-time highs again this week keeping their price trends firmly intact. Peeling the onion to look inside these indices, participation or breadth, as measured by the S&P and NYSE advance-decline lines, also remain in confirmed uptrends and are not signaling any meaningful deterioration yet. As I write this note on Friday afternoon, the Russell 2000 has pulled back over the past 2 days after a 12.7% rebound from just the January 4th lows that extended the rebound that began in late September 24 lows to over 50%. Impressive moves to say the least! Minor divergence to keep an eye on heading into February - I continue to expect a temporary, multi-month pullback or pause to develop for equity markets in Q1 given our weekly momentum indicators are moving toward overbought levels. However, at this point, there is not a lot of meaningful technical evidence to conclude a correction is beginning. I would highlight that in the very short-term there are a few divergences I will be monitoring closely in the coming weeks. Specifically, the Russell 2000 made new price high on January 20th but relative performance versus the S&P 500 has diverged this week peaking on January 14th. Conversely, the S&P High Beta ETF (SPHB), which is one of our recommendations for exposure to cyclical/epi-centerstocks, also peaked in price and relative performance versus the S&P 500 on January 14th. Why am I focusing on such minor divergences in this week’s note? Well, it is the small divergences that eventually lead to bigger divergences, so it is important to monitor potential changes taking place as they develop week to week. At this point, I view this week’s pullback to be just a short-term pullback and expect another upside move next week into month-end. I’ll be paying close attention to the relative performance trends of the Russell 2000 and SPHB ETF to see if they diverge further from their prices as a sign their uptrends are beginning to peak. Homebuilder and Housing are timely again following Q3-Q4 pullbacks - My expectation is that we are likely to see more industry group rotation from recent leaders to recent laggards develop through Q1. As I have mentioned regularly in this space, I use weekly momentum indicators as useful tools to track 1-2 quarter trend shifts across markets, screening for those groups showing evidence of bottoming. What stands out this week are the homebuilding and housing related stocks. Sure, they rallied strongly on Tuesday and Wednesday, but their weekly chart profiles suggest this group is early in a new upside move after pulling back through most of Q3-Q4. Stocks such as DHI, LEN, TOL, PHM, HD, and even THO all have similar chart profiles and are timely long candidates as is the ITB ETF featured below as a proxy for the Housing group. Figure: Weekly Sector ReviewSource: FSInsight, FactSet Growth sectors, technology, and consumer discretionary are rallying from the lower end of trading ranges that developed in Q3-Q4 and are reclaiming their 50-day moving averages. Following up on last week’s comment, Cyclical sectors are showing very early signs of starting short-term pullbacks. Healthcare is noteworthy given its relative performance continued to strengthen from oversold levels this week above its 50-day relative performance moving average. Figure: Best and worst performance sectors over past 3 months
- Technical Strategy
US Dollar is Likely in Early Stages of Q1 Risk Off Bounce
2021 Technical Outlook Webinar replay (click here) - If you missed my 2021 Technical Outlook Webinar this past week, I’d encourage you to watch the replay. In addition to outlining the longer-term cycles I view as important, along with expectations for rates, currencies, and commodities, I also discuss the reasons why investors should be prepared for a 2-3 month pullback in Q1. A Q1 pullback would set the stage for another upside move in 2021 - To be clear, I continue to view a Q1 equity pullback in the range of 7-10% to be a normal event that develops during most years and NOT the beginning of a major bear market correction. The longer-term 4-year cycle work I discussed during the webinar suggests equity markets are likely to move higher in 2021 following a temporary pullback in Q1. Early signs the US dollar is beginning a temporary, risk-off, counter trend Q1 bounce - The decline in the US dollar since Q2 2020 has been one of many tailwinds for risk assets such as equities and specifically for cyclical stocks. In addition to the weekly momentum indicators I expect to peak in Q1, the behavior of the US dollar is likely to be an important ‘tell’ for risk assets. As I discussed in the webinar, the longer-term trend for the US dollar remains negative BUT a counter trend bounce is likely in Q1. Why? The weekly chart of the US Dollar below illustrates the dollar having already corrected to its next support band between 88-89, near the 2017 lows and just above a 50% retracement at 87. I am expecting a temporary bounce from current levels that is likely to be part of an overall pause or pullback in risk assets. Zooming into the shorter-term daily chart below, we can see the last move lower is the DXY’s third down leg from the March highs, which is often the point a counter-trend bounce develops. Expect a rebound to be relatively short lived and likely to stall at the 92-93 the resistance band by late Q1/early Q2. Figure: Weekly Sector ReviewSource: Fundstrat, FactSet No meaningful changes to our sector outlook this week. Growth sectors, technology and consumer discretionary remain range bound with longer-term uptrends. Cyclicals continue to rebound but are showing very early signs of starting a short-term pullback as the US dollar bounces while defensive sectors are showing early signs of bouncing. Healthcare is noteworthy given its relative performance continued to strengthen from oversold levels this week above its 50-day relative performance moving average. Figure: Best and worst performance sectors over past 3 months
- Technical Strategy
Markets on Track For Q1 Tactical Peak; EBAY is a Timely Buy
After yet another volatile start to the week, equity markets have resumed their uptrend following the Georgia election with cyclicals accelerating. Many managers have had to scramble to add risk back to their portfolios raising the question “has anything changed technically?”. The simple answer is no. As I wrote last week “The first few days and weeks of January are notoriously volatile so I would caution readers of overreacting to headlines too quickly at the beginning of the year. It’s possible equity markets pivot lower early in January but my expectation is for an additional move higher into late January-early February before our weekly momentum data peaks signaling a tactical top.” Looking through January, the technical roadmap that has the highest likelihood for success is further upside as more managers add risk and more cyclical exposure in anticipation of further stimulus. However, in the same way I’ve cautioned readers from turning overly cautious to negative headlines through the summer and fall, particularly around politics, I will be cautioning investors from becoming excessively bullish, at least from a tactical, multi-month perspective heading into late January and early February. I can’t state for certain that we will see the market pullback, but many of our trend and momentum cycle indicators are working toward overbought levels that suggest preparing for a pullback into Q2. I’ll be looking for divergences/weaknesses in some of the recent leading areas, such as small-caps and emerging markets, and strength in more defensive areas, such as staples and healthcare, as a sign the market’s internals are changing. The bottom line here is to remain patient and to pay attention to the market’s technical changes more than ever, particularly as headlines become more optimistic. What to do? Every portfolio should hold a core list of stocks that are in strong price and relative performance uptrends but I look for stocks that are bottoming intermediate-term as ideas to allocate new capital to. What do I mean by bottoming intermediate-term? Take a look at the eBay chart above. The weekly momentum indicator in the top panel is a useful technical tool to track the intermediate-term or 1-2 quarter trend shifts. After peaking in July, it is now showing evidence of bottoming and turning up just as EBAY bottoms at support near its rising 40-week (200-day) moving average. Bottom line: I view EBAY as a timely idea to increase exposure to in a portfolio. I recommend investors remain patient and pay attention to the market’s technical changes more than ever, particularly as headlines become more optimistic. Figure: Weekly Sector ReviewSource: Fundstrat, FactSet The Technology and consumer discretionary sectors continue to trend sideways relative to the S&P 500 while cyclical sectors continue to emerge and safety underperform. Figure: Best and worst performance sectors over past 3 months
- Technical Strategy
The Perspective on a Potential 1Q20 Equity Market Pullback
After a historic rebound in 2020, the question investors are asking the most is are we heading into year-end correction? The short answer is I’m expecting equity markets to begin a correction, or at least a pause, in the early part of 1Q21. However, I caution investors from overreacting to a pending pullback. As I have mentioned from time to time, Peter Lynch, Fidelity’s star manager of the Magellan Fund between 1977-1990, had excellent advice for investors when he stated “Far more money has been lost by investors preparing for corrections than has been lost in the corrections themselves”. The important technical point is to build a longer-term perspective to understand the ongoing volatility that develops every year. I rely on three main investment horizons in my investment roadmap. 1) Consider the long-term, secular backdrop. 2) Markets in their current 3-4 year cycle that responds to liquidity controlled by the federal reserve and to economic growth. And 3) what is the tactical, multi-month outlook that tends to respond to the earnings cycle, investor sentiment, and technicals, such as overbought and oversold readings? 1) From a secular trend and cycle perspective, equity markets have ebbed and flowed, rallied and consolidated, around a 17-year cycle. That may seem a bit odd at first glance but these long-term cycles fit well with the demographic and life cycle of each generation. My analysis suggests equity markets are likely in a period of expansion that could last into the early-mid 2030s. If the secular trend that began in 2000 continues, a move to S&P 14,000 is not unreasonable from a technical perspective. Now that’s food for thought…and debate! 2) While the technical backdrop suggests equity markets are in a secular uptrend, those long-term trends tend to ebb and flow around a 4-year cycle. Liquidity and economic growth are the two main catalysts driving these multi-. year cycles and there is a reasonable debate that the US election cycle is an additional catalyst. Regardless, since 1945, a 4-year cycle is sufficiently evident that it would be prudent to incorporate as a factor too. For example, a 4-year market cycles defined the cycle lows during the secular uptrends of the 1950s-1960s and 1980s-1990s and appears to be doing so in the 2010s-2020s. I view the March 2020 low as another cycle low following Q1 2016 low that should carry markets higher through 2021 and likely into 2022. If history is a guide, then the average 4-year cycle rally in a secular bull market of 100-110% which suggests the S&P could reach 4400-4600 by 2022. 3) If my roadmap is correct, a pullback in 1Q1 is likely to be temporary, the proverbial pause that refreshes, and not a major cycle peak. Equity markets have rallied strongly and are starting to move toward overbought levels based on the weekly momentum data. The first few days and weeks of January are notoriously volatile so I would caution readers from overreacting to headlines too quickly at the beginning of the year. It’s possible equity markets pivot lower early in January but my expectation is for an additional move higher into late January-early February before our weekly momentum data peaks signaling a tactical top. Sectors: Tech has bounced back from the lower end of its 2-3 month consolidation and is in a broad, 4-month relative performance trading range. The discretionary sector is also bouncing back following its recent near-term pullback with its longer-term uptrend. Cyclicals remain in emerging uptrends with financials above their 50-day relative moving averages, while industrials, materials and energy are pulling back or pausing near their respective rising 50-day relative moving averages. In contrast, safety sectors, such as staples, healthcare and utilities remain in relative downtrends, while materials bounced back after a brief pullback. Bottom Line: Use pending strength in January to prepare for a more volatile first quarter. If you are highly leveraged trader, reduce risk in anticipation of a bumpier ride in Q1. For longer-term investors, keep some buying powder dry to take advantage of pullbacks into Q2 to increase exposure to cyclical stocks. Happy New Year and thank you for all your support in 2020! Figure: Weekly Sector ReviewSource: Fundstrat, FactSet Technology has bounced back from the lower end of its 2-3 month consolidation and has recaptured its 50-day moving averages of relative performance leaving it in the middle of a broad, 4-month relative performance trading range. The discretionary sector is also bouncing back following its recent near-term pullback with its longer-term uptrend. Cyclicals have ebbed and flowed lately but remain in emerging uptrends with financials above their 50-day relative moving averages while industrials, materials and energy pull back or pause near their rising 50-day relative moving averages. In contrast, safety sectors, such as staples, healthcare and utilities remain in relative downtrends while materials bounced back after a brief pullback. Figure: Best and worst performance sectors over past 3 months
- Technical Strategy
A Q1 Pullback Appears Likely but Temporary
Coincidently, as I was preparing for this week’s note, I came across a quote from Peter Lynch, the legendary portfolio manager of Fidelity’s Magellan Fund between 1977-1990. Peter noted that “Far more money has been lost by investors preparing for corrections than has been lost in the corrections themselves”. I view this as sage advice heading into Q1 2021 as all us on the Fundstrat macro team assesses the risks facing investors early next year. If you are interested in more of Peter Lynch’s food for thought quotes they are readily available on the internet or at this link (click here) As I noted here over the past few weeks, I am expecting a pullback in Q1 that is likely in the 7-10% range over a period of 2-4 months. I obviously cannot say for certain the exact date when the correction will begin, but my read of the technical data at this point is for further upside in January with a tactical peak developing early to mid-February. This week’s chart below outlines a likely roadmap through Q1. “Far more money has been lost by investors preparing for corrections than has been lost in the corrections themselves”. Peter Lynch So what should an investor do? If you happened to miss the Fundstrat Macro webinar this past Thursday (click here), Tom Lee, Brian Rauscher and I outline our expectation for equity markets in 2021. Interestingly, while we reach our conclusions independently, we all agree that a pullback in Q1 is likely to be temporary and an opportunity to increase exposure to cyclical stocks. Pullbacks are always unnerving as they develop, but it is important to remember that 7-10% corrections are consistent with the normal, stair-step pattern of higher highs and higher lows that define the uptrend of a longer-term bull cycle. For the active market timing trader running a higher octane, higher risk portfolio, I recommend trimming exposure in early Q1 and having cash ready to redeploy on the pullback. However, returning to Peter Lynch’s quote above, longer-term investors should stay focused on the underlying bullish market cycle, view pullbacks as temporary and as an opportunity to revisit many of the leading cyclicals at better entry points heading into Q2. Happy Holidays all and thank-you for your support in 2020! Figure: Weekly Sector ReviewSource: Fundstrat, FactSet Technology is bouncing back from the lower end of its 2-3 month consolidation as more cyclical sectors, notably financials and energy, pause after strong surges earlier in December. Materials interestingly, bounced back from just above its 50-day relative performance moving average keeping its uptrend intact. In contrast, safety sectors, such as staples, healthcare and utilities remain in relative downtrends while materials bounced back after a brief pullback. Figure: Best and worst performance sectors over past 3 months
- Technical Strategy
Short Lived Pullback Underway - Key S&P Levels to Focus On
Equity markets pulled back this week but I’m expecting the current pullback to be short-lived with further upside into year-end and early Q1. By February, however, weekly indicators tracking 1-2 quarter shifts are likely to be overbought after bottoming at the beginning of September with most cyclical stocks. The pending pullback into Q2 should prove to be a healthy pause within a bull market that likely continues higher through into year-end 2021. Interestingly, despite that longer-term outlook, many investors are focused on the very short-term, asking for the likely path for the S&P into year-end. If you recall, in last week’s note (here) I outlined the technical reasons why a short-term pullback was likely pending. Yellow flags included the Russell 2000 Small-cap Index surging 30% from its September lows, while low put call ratios and elevated bullish sentiment indicators were potentially signaling excessive near-term optimism. Equities markets were increasingly choppy moving through the past week with declines on Monday and Wednesday, anemic trading on Thursday and further weakness into mid-day on Friday as I write this note. Daily momentum indicators, tracking 2-4 week swings, are negative, which understandably has short-term technical traders expecting further weakness in the coming weeks. All of these are legitimate concerns but I would counter, that so far, the actual price profile, or shape of the equity market remains positive. Breadth or participation remains very broad and beyond pulling back for just one week, the number of stocks in uptrends remains robust. My expectation continues to be that this pullback will be shallow and short lived. Looking at the S&P 500 in the chart below, note the momentum indicator in the top panel has turned negative down again as the S&P pulls back from its recent all time high. While it’s certainly possible the pullback could last longer than I expect, I would point out that the decline is only testing first support at the 15-day moving average (green line) which often acts as trading support. From my perspective the S&P would need to close below its 5-day moving average (3649) to even signal the beginning of a correction and would next support is very close by between the 23.6% retracement at 3600 and September highs at 3587. Bottom Line: As more traders begin to focus on lower levels for the S&P 500, I expect the S&P to hold above its first band of support between 3600-3650 round numbers and head higher into year-end. Figure: Weekly Sector ReviewSource: Fundstrat, FactSet There was no material change to the relative performance trends for most sectors. Communication Services were noteworthy strengthening this week to challenge the upper end of the 2020 trading range but a successful break-out has yet to developDefensive sectors, such as Staples and Healthcare bounced but remain in relative performance downtrendsTechnology see-sawed for the week closing weaker in relative performance vs the S&P 500 while more cyclical sectors, such as financials, materials, industrials and energy, remain above rising 50-day moving averages of relative performance. Figure: Best and worst performance sectors over past 3 months
- Technical Strategy
ADI: An Emerging Cyclical Tech Name to Buy on Pullbacks
Bull market behavior - At the risk of stating the obvious, the surge in equities has been nothing short of impressive. The number of stocks participating on the upside continues to expand as more economy sensitive stocks either break out above their June-October trading ranges, or in the case of financials and energy, reverse 2-4 month downtrends. And, while cyclical stock accelerate, growth stocks continue to consolidate in orderly, sideways trading ranges toward longer-term support at their rising 200-day moving averages, working off the overbought condition that developed in the summer. From my technical perspective, the overall behavior reflects a market in the relatively early stages of a normal bull cycle with capital flowing into more pro growth groups from safety asset classes like treasury bonds and safety sectors, such as staples. Too far too fast? - Of course, with cyclical stocks rallying so strongly over the past 3 months, a growing number of managers are questioning whether the rally has gone too far too fast. After all, the Russell 2000 Small-cap Index, a barometer for cyclical stocks, is up over 30% from late September and just over 20% from the end of October! For short-term traders, yellow flags are beginning to show up and signal caution as put-call ratios have dropped to low levels and sentiment indicators have risen to relatively high bullish readings. In addition, after the surge over the past 4-6 weeks, I’m finding it increasingly difficult to find new ‘timely’ trading ideas. So what to do? With trading indicators at short-term overbought levels, a pullback should not be a surprise but I continue to expect dips to be short lived. For traders, I find trailing stops near the 15-day moving average to be one useful way to stay with this type of strong trend while keeping drawdowns relatively small. However, the more important message continues to be that the bull cycle is not showing any meaningful evidence of peaking yet. I expect further upside through 2021 and expect a tactical, multi-month pause/peak to develop by mid Q1. By that time, the weekly indicators I follow, tracking 1-2 quarter shifts, are become likely to be overbought and support a pause in the uptrend. Bull cycle behavior as the number of stocks participating on the upside continues to expand. Trading indicators are becoming overbought. Expect pullbacks to be short lived. ADI – A cyclical technology idea to accumulate on near-term pullbacks. The current cycle looks similar to the post 2012 and 2016 bull cycle for ADI. What to buy on near-term pullbacks? Analog Devices (ADI) continues to hit my technical screens as name to own for the cycle. Why? ADI is a secular uptrend but also has the benefit of being a cyclical stock that will benefit from an improving economic backdrop. In the very short-term ADI does look extended, but similar to the post 2012 and 2016 breakouts, pullbacks are shallow and ADI continued to trend to the upside. Use pending short-term pullbacks to build exposure. Figure: Weekly Sector ReviewSource: Fundstrat, FactSet Industrials and materials continue to trend above their 50-day relative performance moving averages. Financials and energy were noteworthy as they finally broke above their declining 50-day moving averages of relative performance vs the S&P 500. The discretionary sector remains in a relative performance correction within a longer-term uptrend while technology remains range boundSafety sectors, such as utilities, staples and healthcare, remain in weak relative performance trends as cyclicals rebound. Figure: Best and worst performance sectors over past 3 months
- Technical Strategy
The Ebb and Flow Between Growth and Cyclical stocks
BABA and NTES are timely again after their recent corrections If you didn’t have a chance to join our FSInsight Virtual Conference on Thursday you can find the replay at this link (click here). My technical analysis presentation begins at 1:39:20 and at 1:48:10 I discuss the hotly debated topic of growth stocks versus value stocks. While I expect cyclicals to outperform into Q1 and likely through 2021, I don’t believe growth stocks are establishing long-term tops as some market pundits have suggested. From my technical perspective, there simply is insufficient technical evidence to make that case. Sure, many growth are well advanced above their uptrends but many other growth stocks are working through orderly sideways trading ranges or consolidations. I view these types of pauses in uptrends as normal and healthy technical behavior. It is not unusual in bull markets for leading stocks to pause, consolidate and catch up to longer-term moving averages which is often near their 200-day averages. Bull markets are a type of relay race where leadership is often passed between a number of market leading groups. Why is this relevant now? Well, after pulling back from their late summer and fall highs, a growing list of growth stocks are moving back to levels where I expect to see them begin to bottom and start rebounds. Incrementally, one by one, I am seeing a growing list of growth stocks starting to show evidence of bottoming intermediate-term. The bottom line is that while I expect cyclicals to outperform through 2021, it does not mean growth stocks aren’t also going to participate on the upside. In fact, I’m expecting leadership to ebb and flow between growth and cyclical stocks over the coming quarters and technical analysis will be one of the better financial tools to spot timely entry points in each theme. Expect market leadership to ebb and flow between growth and cyclical stocks. This is stock pickers market and technical analysis will be helpful spotting timely buy points in both growth and cyclicalsAfter correcting almost -20% Chinese technology stocks, such as NTES and BABA are at timely buy points NTES and BABA are two large-cap Chinese technology stocks that illustrate my points above. NTES peaked at the end of August and BABA at the end of October. Both stocks have corrected -20% BUT are now near timely buy points as they test support bands just above their rising 200-day sma. I view both stock to be at timely entry points for those investors looking to add growth exposure. Figure: Weekly Sector ReviewSource: Fundstrat, FactSet Cyclical sectors hung on to most of their gains from the prior week following more positive vaccine news. Energy and financials were again noteworthy this past week holding their gains from the prior week and remaining above their eclining 50-day moving average of relative performance. Industrials and materials continue to stand out as leading cyclical sectors while FinancialsAfter many weeks of underperforming, the discretionary and technology sectors began to show evidence of stabilizing. We continue to view the pullback in these two leading growth sectors as healthy pauses in longer-term price uptrends. Figure: Best and worst performance sectors over past 3 months