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 Review
Source: 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
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