Investors remain understandably cautious heading into 2H20 following the unprecedented volatility seen. Equity markets are likely to remain choppy in Q3, but the longer-term cycle backdrop remains supportive of higher equity levels and we continue to caution clients from becoming overly defensive.

I favor a balanced portfolio of both secular and cyclical growth with cyclicals as timely. Equity markets in general, and cyclicals specifically, are showing evidence of bottoming short term at important technical support, most near rising 50-and/or 200-dma’s.

There is early evidence of relative performance improving, following pullbacks through June. Among stocks showing such moves are: Airlines (JBLU, ALK); Industrials (CMI, PCAR); Rails (KSU, CSX); Homebuilders (DHI, LEN), Retail (BBY, DLTR); Cruise lines (CCL, RCL); Chemicals (LYB, LIN); Electrical Components: (APH, TEL); Semis (MCHP, TXN, XLNX, MU): Communication Equipment(CSCO, LITE).

I continue to expect the leadership to ebb and flow between secular growth and cyclical growth through Q3 into YE/2021 with cyclicals incrementally carving out longer-term bottoming profiles. I see the recent pullback in more cyclical stocks to be a timely entry point to increase exposure.

Daily Momentum oversold, bottoming as JBLU pulls back to support at its 50-dma

Q3 Pullbacks Likely Shallow, Long Term Backdrop Positive

The flip side is that growth stocks are now less timely, so wait for pullbacks/pauses in Q3 to increase exposure. They rallied strongly into quarter-end but are becoming overbought short-term and likely to pause/pullback in early Q3. Nevertheless, their longer-term technical profiles remain bullish as illustrated by AMZN, NFLX, BABA, PYPL, ADBE and EBAY emerging from multi-year trading ranges.

The frame of the debate is about whether this is a new bull cycle or just a head fake, a bear market rally. I see a new bull cycle. The bear case suggesting the Q2 rebound will fail is understandable but not my view. Why? The long-term secular and 4-year cycle backdrop support a case that the lows in March were major cycle lows and pullbacks in Q3 are likely to be shallow.

Figure: Weekly Sector Review
Source: Fundstrat, FactSet

Q3 Pullbacks Likely Shallow, Long Term Backdrop Positive

Figure: Best and worst performance sectors over past 3 months

Q3 Pullbacks Likely Shallow, Long Term Backdrop Positive

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