Utilities and REITs have spent the past week digesting their recent overbought conditions, a process that has been facilitated by the snap back in yields from 10-month lows. We’ll see what this week’s Fed meeting provides, but yields remain range bound with a downward bias in our view. Utilities continue to possess the stronger trends of the two, with each of the sector’s industries firmly in an uptrend. Strength in REITs on the other hand is not as ubiquitous, with areas such as Diversified, Industrial, Residential and Specialized continuing to carry the leadership baton. Unfortunately, the same cannot be said of those operating in the retail space, as the battered sub-industry is off nearly 30% from last summer’s peak. We have received a number of question on the space and for the first time in months, there looks to be a sliver of hope on the horizon. Not out of the woods by any stretch, but as the chart below illustrates, I’m encouraged with the 5-month base that the group has been carving out. An acceleration through resistance, which also happens to correspond with the 200-day, would be an important victory for the bulls. They still have plenty of work to do, but ADC, NNN, O, BFS and UBA are a few that are further along in the healing process.
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Accelerating to yet another all-time high, large cap technology continues to possess one of the strongest trends in the market today (9/12). Unfortunately, the same cannot be said across the capitalization spectrum, where small and mid caps have been digesting a few of the cracks that we discussed in early August. While divergences can persist and admittedly are terrible timing tools, we find it somewhat suspicious that the riskier part of the sector has peeled off. Industry wise, two really standout, where software continues to exhibit strong relative momentum, while comm equipment’s corrosion persists. Whether positioned to break out from a longer-term base or acting particularly distributive on a multi-year basis, today’s report takes a look at 10-stocks that caught my eye within the tech sector.
The good news is that small caps have responded to their recent oversold condition at support, unfortunately this bounce has been met with lackluster momentum, particularly within the value style. Growth continues to be buoyed by Health Care, as the style’s top sector weight possesses the strongest trends and momentum in the broad market today. The same cannot be said for value’s largest holding, where financials, especially banks, remain under considerable pressure. Fortunately there is a glimmer of hope in the near-term for value investors following 1300 bps of underperformance year to date. With Health Care overbought (especially biotech) and banks oversold, pressing the style bet at current levels seems like a risky proposition until these conditions resolve themselves.
After rallying to all-time highs in mid-July, with the exception of Aerospace & Defense industrials have seen a loss of momentum across the board. This growing risk aversion is further reinforced by the bond market’s increasingly skeptical view. The most notable of which has been the violent reversal in airlines, and the group’s inability so far to generate any meaningful momentum out of the current oversold condition. I’m willing to ride out the oversold condition, but it’s time for upward momentum to present itself.
With both the discretionary and staples sectors trading at fresh relative lows, we have seen little materialize in the charts that would alter our underweight view for each. While it's clear that challenges persist for both, long and short opportunities continue to emerge. On the long side, Polaris and PVH continue to intrigue us, while Coach faces an important oversold condition following its recent gap lower within a larger base formation. Homebuilders are slicing through their absolute and relative uptrend for the first time in nearly a year, creating interesting oversold conditions in KBH, LEN, TOL and MTH as each wrestles with its respective 200-day. On the flip side, 2 longer-term uptrends are being called into question, where Domino's and Mondelez are displaying the distributive price action that should warrant some caution.
Wolfe Research's Senior E&P analyst, Josh Silverstein, hosted a webcast examining E&Ps with the insight of Wolfe Research Technical Analyst Rob Ginsberg.
As the broader sector works off the excesses that had developed around resistance, and banks struggle with the reversal in yields, a handful of industry groups continue to impress. Capital Markets, led by Asset Managers & Custody Banks, Exchanges, Financial Data and Online Brokers possess some of the strongest trends in the sector today, and we highlight a bunch of our favorite names within each in today’s report. We remain particularly intrigued with the asset managers, where despite the secular concerns around their business, the equities continue to trace out longer-term bases. We view the recent post-earnings consolidation as an opportunity to build exposure in one of our favorite contrarian plays in the market today. On the flip-side, regional banks (KRE) continue to unwind the post-election euphoria, and look increasingly vulnerable as they struggle beneath the 200-day moving average. Needless to say, the clock is ticking for momentum to present itself.
Given the demand for quality short ideas, Chris Senyek’s piece on Tuesday, Avoiding Stock Blow-Ups: Earnings Quality (EQ) Refresh, really caught my eye.
While the S&P 500 suggests a modest pullback, the deterioration beneath the surface would indicate otherwise, as the momentum divergences highlighted earlier this month continue to play out. As a handful of charts in today’s report highlight, the market's underlying foundation is becoming a growing concern. Led by small caps, the average stock is acting more distributive, industrials are rapidly losing their relative strength, while 10-year yields continue to struggle beneath prior support. In aggregate, this speaks to the growing risk aversion among investors. This deteriorating backdrop places a great deal of importance on the developing oversold condition, particularly for small caps. Failure of momentum, breadth and credit to confirm and we could be looking at a challenging post-Labor Day environment. Given the increasingly wobbly underpinnings, I have a feeling that these attributes will be noticeably absent on the bounce.
Since the peak in the energy sector back in 2014 we have been constantly on the lookout for signs of a sustainable trend change. It’s not atypical for a sector that has just completed a major bear market (think of tech post ‘02 or financials after ’08-09) to languish for years before investor wounds and their scar tissue have completely healed. Energy has tried on multiple occasions, but each attempt has failed over the past 3-years. We’re constantly on the lookout for momentum and relative performance to confirm, but for the most part, all we have experienced since the peak has been a bunch of head fakes. Once again the sector is trying to steady itself following a deeply oversold condition, albeit within a downtrend, as 20-day highs have expanded to the highest level since December. Absent the broad market’s rally off the lows last February, pressing longs when 1-month highs are expanding coming out of an oversold condition has been a losing proposition (red arrows). Needless to say, we’re not convinced that the lows are in.
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