Since peaking back in the summer of ‘15, it has been an interesting ride for biotech to say the least, but the group (at least on an equally weighted basis) finally broke out to fresh all-time highs, helping to confirm our bullish view. While trends and momentum continue to favor equal over cap and with it small over large, I’m also cognizant that the driver of this outperformance will be the hardest hit during the next overbought consolidation, an environment we’re firmly in following yesterday’s price action.
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So much has been made of the banks benefitting from higher yields - if only it was that easy. While the backup has provided a healthy tailwind for the larger cap names, despite this consensus view, small and mid continue to languish on a relative basis. Concerns around loan growth has been an issue that some have highlighted, but we remain puzzled by their persistent underperformance. For those looking to increase exposure, momentum would suggest to continue to gravitate up the cap spectrum. One of our preferred plays within the sector has been and continues to be the Asset Managers, as this group steadily climbs the wall of worry surrounding active management. Breadth is healthy, with a plethora of bullish trends - BLK, TROW, EV, AMG, LM, BEN, WDR, PZN, VRTS, APAM, IVZ, OMAM.
In a market of extremes, discretionary’s outperformance over Staples stands out as well. This is definitely a tricky one as trends continue to heavily favor discretionary, but one has to question whether the vertical acceleration experienced over the past few months is sustainable and not prone to some mean reversion. Retail has been discretionary’s biggest winner of late, disposing of last month’s overbought condition with ease. For the bulls, now the hard work begins, as the latest overbought environment is developing at crucial multi-year resistance. The group’s ability to successfully navigate this important level will go a long way to easing our longer term trend concerns.
Perplexed. There is no other way to say it. Since 10-year yields reversed course in early September, working their way towards important resistance, small cap banks have merely shrugged their shoulders. The inability of the curve to steepen has not helped, but that hasn’t been a factor for large-cap banks, which have seen their shares rally strongly over this time frame. With banks accounting for nearly 23% of the value index compared with only 2% for growth, it is imperative that this group exhibit some much needed relative momentum in order to reverse growth’s dominance.
After trouncing the competition last year, the technology sector has gotten off to a quick start in ’18, rallying nearly 5% to start the year. However, due to a few cracks beneath the surface, I’m beginning to question the sustainability of its leadership. Since that initial shot across the bow back in late November (What a Day...Is the Momentum Trade Over?), I’ve been on the lookout for signs that the sector is ready to hand off the leadership baton. While tech responded out of that November scare by rallying to fresh highs, the lack of a few key attributes during this seasonal move has left me somewhat uneasy. Relative performance has diverged on the sector’s new high, while semiconductors and small caps have failed to confirm as well. More troubling however, has been the steady loss of internal momentum, particularly on an equal-weighted basis. I might be a bit early, but with these growing divergences, if given a clean sheet of paper, I’d be more inclined to reduce exposure and position for increased volatility on the horizon than press longs. Any thought of bearishness or concern has been steamrolled by this tape, so the fact that I gave myself agita writing today’s note only reinforces why I believe it is the prudent thing to do.
Since the oversold low back in August, I have been impressed and encouraged by the price action that the Energy sector has displayed. Each test has been successfully navigated, which is exactly what you want to see as meaningful trend changes develop. While I have been and remain constructive on the sector, multiple overbought signals are beginning to develop that warrant some consideration in the near-term. For those tactically inclined, current price levels look like a good opportunity to take some profits and revisit after the excesses burn off (~3-5%).
Earlier this morning (1/2/18), Mike Kiernan, Wolfe’s Director of Research, sent around the Wolverine update for the firm’s top fundamental picks for the next 6-12 months (see his email below). Always a believer in marrying the fundamentals with the technicals, I thought it would be helpful to provide the charts for each. While a few have some work to do, there are plenty of constructive setups on both the long and short side.
Chris Senyek had his latest “Earnings Quality” report out yesterday (12/20/2017) (see links to note and video tutorial below), so we thought it would be helpful to highlight a few of the names where the technicals lineup with his fundamental concerns. As we all know, regardless of earnings quality, fighting strong price trends and momentum can be a frustrating and money losing proposition. It’s when trends begin to crack and momentum wanes, that I get particularly interested on the short side. Of the stocks discussed in yesterday’s report, Advanced Micro Devices (AMD), Tesla (TSLA), T-Mobile (TMUS), Chesapeake Energy (CHK), Lumentum (LITE), Oclaro (OCLR) and Inphi (IPHI), possess these attributes, with each exhibiting longer-term absolute and relative distribution. Trade accordingly.
Thanks to the tax bill, a corresponding back up in interest rates and a couple of timely rating changes by Steve Fleishman (Utilities & Power: 2018 a taxing year for utilities; downgrade to Underweight and Midstream: Buy the transition - Upgrade midstream to Overweight), Utilities and Midstream are each at critical junctures from a trend perspective. What started out as a modest consolidation following last month’s overbought condition, the bottom has fallen out of the utility sector, particularly on a relative basis. Technically, we are at a crucial moment, as a dramatic oversold condition is building at significant support, while 10-year yields challenge multi-year resistance. No question, some near-term relief is in order, but the presence of momentum (i.e. breadth, relative strength) or lack thereof will be the determining factor into how the sector trades in ’18.
Hovering at crucial support last month, Airlines delivered exactly what the bulls wanted to see out of the important oversold environment. Now overbought at resistance, how they respond to this overhead supply will be an important tell for the start of ‘18. Plenty of work lies ahead, but their recent response has gone a long way in helping to solidify what had been a questionable trend.
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