Don’t Lose Sight of Improving Technical Backdrop into 2021
One of the biggest benefits of studying technical analysis, observing the change in prices across asset classes, is that it filters out the mainstream and social media noise we are all bombarded with. Investors are overwhelmed with election rhetoric, renewed COVID-19 concerns, stimulus talks that are on and off again every day not to mention the volatility of earnings reports. It’s no wonder equity markets have remained in choppy trading ranges since the beginning of September with many investors struggling for conviction in either direction.
I’m obviously biased as a technical analyst, but I am far more interested in what IS changing between and within markets and less concerned with someone’s explanation as to WHY they are changing. As one seasoned portfolio manager with over four decades of experience managing a large international portfolio regularly reminds me “Rob, your job is to identity what IS changing in markets and it’s the media’s job to try to weave together stories that try to explain WHY”. This is a particularly important point to remember at the momentum as the headline drama builds into another election. Why?
The first key technical point is to stay focused on the fact that the underlying market cycle, generally measured over a 3-4 years, is rarely disrupted by an election. By my analysis, the current 4-year markets cycle should carry markets higher through 2021 well into 2022 before we see evidence of a cycle peak. Secondly, despite the choppy trading that has developed since the beginning of September, there are a number of bullish internal leadership shifts developing. Growth stocks are pausing but are not breaking down while participation is broadening to a growing number of cyclical groups. I view this rotation to cyclicals as a healthy development for equity markets into and well through year-end. In addition, the behavior of other assets classes remains supportive of the rotation developing within equity markets with 10-year bond yields continuing to show evidence of bottoming.
Flowserve (FLS) – A contrarian cyclical recovery idea in the early stages of bottoming. I continue to encourage investors to ignore the headline noise and choppy trading for the coming weeks and to remain positioned in the direction of the improving longer-term cycle. Specifically, use near-term pullbacks to continue broadening portfolio exposure to include more cyclicals as part of a bar-bell portfolio that already includes core positions in many of the leading growth stocks. Fundstrat’s Tom Lee and Ken Xuan publish six thematic portfolios one of which is a PMI Recovery basket. I would encourage investors looking for a list of stocks that should be beneficiaries of an improving economy to review this list. For contrarian investors, I’m highlighting FLS as a laggard within that list that in the very early stages of bottoming as it begins to rally above its 200-dma and reversing its 2020 relative performance downtrend.
Figure: Weekly Sector Review
Source: FSInsight, FactSet
- Discretionary and technology uptrends intact but pausing while industrials, materials continue to trend above the 50-day moving averages of their relative performance lines versus the S&P 500.
- Financials have stabilized and are potentially within striking distance of rallying above relative performance downtrends. Stay tuned.
Figure: Best and worst performance sectors over past 3 months
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