The market is bouncing around. My work does not confirm that a “shocking rally” is imminent.  With being said, the equity market is tactically oversold, and a bounce could happen at any moment.  Importantly, my earnings revisions indicators do not support the likelihood of a powerful and sustainable bounce at this time.  Thus, I am still viewing rallies as opportunities to sell into, raise hedges, or short once they show signs of failing.  

I don’t like to be the bearer of bad news, but it sure looks like there is an earnings cutting cycle that is coming that will accompanied with economic slowdown fears. The combination will likely create a formidable headwind for the equity market and contribute to the next phase of the ongoing struggles of the market, especially all things cyclical. 

That being said, I don’t see an imminent “hide under your desk” scenario like the Tech wreck and the Global Financial Crisis in my indicators.  My research suggests that the leadership to the downside will begin an important evolution in the coming weeks.  My work shows that in the current phase of this downturn has hit growth, high multiple, and tech names quite hard.  Importantly, the next phase will likely see Tech and Growth stocks starting to incrementally outperform in a still challenging environment.  There’s a lot of headwinds that have not been resolved, and the data suggests that the tug of this market is still down.

There is a brighter side of my view and don’t want to you to get all gloom and doom into the weekend.  The equity weakness will end.  We will survive it.  Thus, one should be getting your shopping list ready for when my key indicators start suggesting that it’s time to pivot.  For example, the extreme damage this week in Target and Wal Mart will ultimately lead to an attractive longer-term entry point. As we come to the end of the earnings season it’s important to remember that much of the market-moving news will now be of a macro nature over the next four weeks or so.  Hence, I believe the analyst community will likely lead the way as they start lowering the forward outlooks for their companies, and let’s always remember that negative pre-announcements can dominate the market headlines during the lull between quarterly earnings.

So, where is the safest place for investors to place their money while the storm passes over us? Normally, at cycle turns, my indicators flash very clear signals and make this question easy to answer.  But as of now, my work is a bit muddy to say the least.  Some might advise you to broadly pile into Staples, but people who did that probably got slammed by the big misses this week in the sector. The current mix of relatively favorable areas that my work likes is quite eclectic and goes deeper than the sector level. In Staples, there are some attractive areas including Tobacco names (Altria and Phillip-Morris) as well as beer companies, which is totally contrarian at this point because nobody I talk with likes them. 

Broadening out from Staples, some large-cap European Pharma is looking relatively attractive, and that they will likely hold up quite well.  In the US, Merck looks favorable based on my work.  Of course, given macro drivers I like a lot of the US Defense Industry names like Northrup, Lockheed and General Dynamics. I’m getting more comfortable at this point slowly nibbling at some airlines as well.

Based on my key indicators, the selling won’t subside until we get more capitulatory selling and prices fall harder. I’m seeing some parallels to the 4Q18 where the markets priced in a deep recession that never materialized. Market depth is low which can result in big swings either way. Buyers are sitting out until they get more clarity.

Stay both cautious and alert for opportunities.  Watch your risk exposures and let’s be ready to spring into action.  We can all survive the bumpy ride and prosper in the longer term.  Hang in there.

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