Sector Buy/Sell Review: 09-17-19

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 BUT it continues to hold onto support at the 200-dma as rumors of a “trade deal” seem to always come just in the “nick of time.”
• XLB rallied last week on hopes of upcoming trade talks and is reversing the oversold condition.
• There are multiple tops just overhead which will provide significant resistance.
• 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

• As noted last week, XLC held support and bounced back towards highs and is testing resistance.
• With XLC not overbought yet, a further rally is possible if the market trades higher.
• Support is held 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.
  • Stop adjusted to $46
• Long-Term Positioning: Bearish

Energy

• What a difference a bit of bombing can make. Last week, we discussed that XLE continues to struggle with supply builds and a weakening economy.
• In one session, XLE broke above the 200-dma and is trading towards previous target resistance levels.
• The rally that occurred is a positive but its too soon to buy into until we see a bit of consolidation of this advance which is now extremely overbought. A pullback to the 200-dma that holds would be an ideal entry point to add weightings.
• We were stopped out of our position previously.
• Short-Term Positioning: Bearish
  • Last week: Stopped out.
  • This week: Stopped out.
  • No position currently
• Long-Term Positioning: Bearish

Financials

• XLF remains in a long consolidation range since the beginning of 2018.
• XLF has reversed its “sell” signal but is back to very overbought. Look for a pullback that retest the breakout of the downtrend to add exposure to the sector.
• We previously closed out of positioning as inverted yield curves and Fed rate cuts are not good for bank profitability. However, there is a trading opportunity present with the right setup.
• Short-Term Positioning: Neutral
  • Last week: Closed Out/No Position.
  • This week: Closed Out/No Position.
  • Stop-loss adjusted to $26.00
• Long-Term Positioning: Bearish

Industrials

• XLI bounced back over the last week on hopes of a trade war “resolution” and is trying to break above a series of previous tops. This is very bullish if it holds.
• We need to wait through Friday to see if XLI can maintain the breakout of if it fails. If it is able to confirm the breakout we will add to our existing holdings.
• XLI is back to overbought but the sell signal is reversing.
• 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.”
• XLK has moved back to short-term overbought, and remains a fairly extended and crowded trade.
• XLK held support at $75 and is breaking its short-term consolidation. Next target are old highs and the top of the uptrend line.
• The buy signal is close to reversing to a “sell.”
• Short-Term Positioning: Bullish
  • Last week: Hold position
  • This week: Hold position
  • Stop-loss adjusted to $75.00
• Long-Term Positioning: Neutral

Staples

• As noted previously, defensive positioning remains a VERY crowded trade.
• The “buy” signal (lower panel) is still in place but has been worked off to a good degree. 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 $58
  • Long-Term Positioning: Bullish

Real Estate

• As with XLP above, XLRE was consolidating its advance and has now pushed to new highs and is extremely extended.
• XLRE is also a VERY CROWDED defensive trade.
• XLRE is correcting its previously overbought condition, 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 has been reduced and has turned positive which is bullish 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

• XLRE and XLU are virtually the same commentary.
• 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.
• Buy signal reversed and held and has now turned higher.
• Short-Term Positioning: Bullish
  • Last week: Hold position.
  • This week: Hold position
  • Stop-loss adjusted to support at $58.00
• Long-Term Positioning: Bullish

Health Care

• XLV has triggered a sell signal but has remained intact and is trying to recover with the market.
• While XLV continues to flirt with support levels. The current correction was expected, and a break above $92 will put old highs into focus.
• We continue to maintain a fairly tight stop for now.
• Short-Term Positioning: Neutral
  • Last week: Hold position.
  • This week: Hold position
  • Stop-loss adjusted to $88
• Long-Term Positioning: Neutral

Discretionary

• Despite the fact the latest round of tariffs directly target discretionary items, XLY rallied anyway on hopes to a resolution of the “trade war” before the holiday shopping season.
• We added to our holdings last week to participate with the current rally, but are carrying a tight stop on the whole position.
• XLY is trying to reverse its “sell signal.”
  
• Short-Term Positioning: Neutral
  • Last week: Hold position
  • This week: Hold position
  • Stop-loss adjusted to $115.
• Long-Term Positioning: Neutral

Transportation

• XTN spiked higher over the last couple of trading sessions on an “oversold” bounce and is now extremely overbought once again.
• XTN remains is a very broad trading range, and this rally is most likely going to fail at the previous highs for the range. It is now make or break for the sector.
• XTN has reversed its “sell” signal but is extremely overbought.
• A break above resistance will set XTN up for a rally to old highs and will become a much more intresting trade.
• Short-Term Positioning: Neutral
  • Last week: No position
  • This week: No position
• Long-Term Positioning: Bearish