Sector Buy/Sell Review: 08-20-19

Each week we produce a chart book of the S&P 500 sectors to review where money is flowing within the market as whole. This helps refine not only decision making about what to own and when, but what sectors to overweight or underweight to achieve better performance.

HOW TO READ THE CHARTS

There are three primary components to each chart:

• The price chart is in orange
• The Over Bought/Over Sold indicator is in gray
• The Buy / Sell indicator is in blue.

When the gray indicator is at the TOP of the chart, there is typically more risk and less reward available at the current time. In other words, the best time to BUY is when the short-term condition is over-sold. Likewise when the buy/sell indicator is above the ZERO line investments have a tendency of working better than when below the zero line.

With this basic tutorial let’s get to the sector analysis.

Basic Materials

• XLB remains confined to a very broad topping pattern currently. With the buy signal fading the risk remains to the downside for now particularly as trade wars continue to linger on.
• XLB is not extremely oversold short-term which could keep XLB in a trading range for a while with risk down to support at $55
• We are remaining underweight the sector for now.
• Short-Term Positioning: Neutral
  • Last Week: Hold current positions with a tighter stop-loss.
  • This Week: Hold current positions with tighter stop-loss
  • Stop-loss adjusted to $55
• Long-Term Positioning: Bearish

Communications

• XLC had gotten very extended and the “buy signal” was also pushing very high levels all of which are now being reversed.
• XLC failed at resistance and has now established a double top. The good news is support is holding so far at $48
• XLC has a touch of defensive positioning from “trade wars” and given the recent pullback to oversold a trading position was placed in portfolios.
• Short-Term Positioning: Neutral
  • Last Week: Hold trading positions
  • This Week: Hold trading positions.
  • Hard Stop moved up to $48
• Long-Term Positioning: Bearish

Energy

• XLE failed at its 200-dma and remains extremely weak.
• XLE broke support and is now rallying to test the previous support as resistance.
• We were stopped out of our position recently.
• Short-Term Positioning: Bearish
  • Last week: Hold current position
  • This week: Stopped out.
  • No position currently
• Long-Term Positioning: Bearish

Financials

• XLF has been in a long consolidation rage since the beginning of 2018.
• XLF remains on a “buy” signal currently and is back to oversold. Look for a bounce back to the top of the trend line. Support must hold at $26.50.
• Fed rate cuts are not “bank friendly” so we will likely reduce exposure to the sector in the ETF model soon.
• Short-Term Positioning: Neutral
  • Last week: Hold 1/2 position
  • This week: Hold 1/2 position
  • Stop-loss adjusted to $26.00
• Long-Term Positioning: Bearish

Industrials

• XLI failed at a “quadruple top” which puts a tremendous amount of overhead resistance on the sector.
• XLI is back to oversold and the buy signal has reversed to a sell signal.
• We reduced our risk to the sector after reaching our investment target. We are now adjusting our stop-loss for the remaining position.
• Short-Term Positioning: Neutral
  • Last week: Hold 1/2 position
  • This week: Hold 1/2 position.
  • Stop-loss adjusted to $72
• Long-Term Positioning: Neutral

Technology

• XLK remains one of the “safety” trades against the “trade war.”
• While XLK is not overbought,it is still fairly extended and a crowded trade.
• XLK failed at the uptrend line so it must hold support at $75.
• The buy signal remains intact but is weakening.
• Short-Term Positioning: Bullish
  • Last week: Hold 1/2 position
  • This week: Hold 1/2 position
  • Stop-loss adjusted to $70.00
• Long-Term Positioning: Neutral

Staples

• We noted last week that after taking profits in the sector, we were finally getting a much needed correction to work off the excess. That is over as “defensive holdings” charged higher on Friday and Monday.
• The “buy” signal (lower panel) is still in place and is very extended. We continue to recommend taking some profits if you have not done so.
• Short-Term Positioning: Bullish
  • Last week: Hold positions, take profits if needed.
  • This week: Hold positions, take profits if needed.
  • Stop-loss adjusted to $56
• Long-Term Positioning: Bullish

Real Estate

• As with XLP above, XLRE was consolidating its advance and has now pushed to new highs.
• XLRE is back to very overbought so be careful adding new positions and keep a tight stop for now.
• We previously recommended taking profits and rebalancing risk as the overbought condition needed to be corrected. That occurred.
• Buy signal is being reduced along, but is holding for now.
• Short-Term Positioning: Bullish
  • Last week: Hold position.
  • This week: Hold position.
  • Stop-loss adjusted to $36.00 for profits.
  • Long-Term Positioning: Bullish

Utilities

• Again, defensive positioning continues to win in the market. XLU likewise is back to overbought but the previously extended buy signal has worked off most of that condition.
• After taking profits, we have time to be patient and wait for the right setup.
• Long-term trend line remains intact and the recent test of that trend line with a break to new highs confirms the continuation of the bullish trend.
• Short-Term Positioning: Bullish
  • Last week: Take profits and rebalance holdings.
  • This week: Hold position
  • Stop-loss adjusted to support at $55.50.
• Long-Term Positioning: Bullish

Health Care

• XLV remains on a buy signal but failed at important resistance.
• While the current correction was expected, support is holding which is bullish.
• Short-Term Positioning: Neutral
  • Last week: Reduce to portfolio weight
  • This week: Hold position
  • Stop-loss adjusted to $88
• Long-Term Positioning: Neutral

Discretionary

• With the latest round of “tariffs” directly targeting consumer goods, XLY is now under attack.
• Interestingly, despite the “delay” in those tariffs, the sector is still weak and threatening to trigger a sell signal.
• We recommended taking profits previously.
• Short-Term Positioning: Neutral
  • Last week: Hold 1/2 position.
  • This week: Hold 1/2 position
  • Stop-loss adjusted to $107.50 after sell of 1/2 position.
• Long-Term Positioning: Neutral

Transportation

• XTN has continued to lag the overall market and continues to suggest there is “something wrong” economically.
• XTN has triggered a “buy” signal but remains confined to a consolidation which has lasted all year. The continued topping process continues to apply downward pressure on the sector.
• There is still no compelling reason at this juncture to add XTN to portfolios. We will watch and see what happens.
• Short-Term Positioning: Neutral
  • Last week: No position
  • This week: No position
• Long-Term Positioning: Bearish