Special Report: Market Review & Update 10-03-19

With the sell off this week, I have been getting a lot of emails asking if anything has changed technically. Normally, on Thursday, we produce a Long-Short Idea List. However, I wanted to use the opportunity today to update a few of the major markets and five sectors that warrant some attention.

Feel free to email me with any questions.

S&P 500 Index

• We are still maintaining our core S&P 500 position as the market has not technically violated any support levels as of yet. However, it hasn’t been able to advance to new highs either.
• Yesterday’s sell-off did NOT violate support, but is also NOT oversold as of yet, which suggests further downside is possible.
• There is likely a tradeable opportunity approaching for a reflexive bounce given the depth of selling over the last couple of days. We will look to add a 2x long-S&P 500 to the long-short portfolio if the market looks like it is going to try and firm up.
• Short-Term Positioning: Bullish
  • Last Week: Hold current core positions
  • This Week: Hold current core positions.
  • Stop-loss moved up to $282.50
  • Long-Term Positioning: Neutral due to valuations

S&P 600 Index (Small-Cap)

• The sell-off was more brutal in small and mid-cap stocks as economic weakness hits smaller capitalization companies harder.
• SLY had gotten overbought, and the sell-off has not retraced back to oversold as of yet.
• The “buy signal” is still intact at the moment but the technical trend is terrible. If support is broken at $85, a retest of $82 is likely. Below that it gets ugly quickly.
• The risk outweighs the reward of a trade at this juncture.
• Short-Term Positioning: Bearish
  • Last Week: No position
  • This Week: No position.
  • Stop loss previously violated.
• Long-Term Positioning: Bearish

S&P 400 Index (Mid-Cap)

• MDY, like SLY, is technically not in great shape. Importantly, MDY has now failed at the top of the downtrend line.
• While MDY registered a short-term “buy” signal, the inability to follow through is disappointing and a failure at the 200-dma will lead to a retest of previous lows.
• We have no exposure to Mid-caps currently and the risk/reward of a trade setup really isn’t there.
• Short-Term Positioning: Neutral
  • Last Week: No holding
  • This Week: No holding
• Long-Term Positioning: Bearish

Emerging Markets

• EEM continues to underperform. The sector did rally previously on hopes of a trade resolution, and the ECB cutting rates, but that rally is simply another rally in a long-term downtrend.
• A sell signal has been triggered as well, but is trying to reverse.
• Unfortunately, EEM failed at resistance, and has violated the 200-dma and support.
• As noted previously we closed out of out trading position to the long-short portfolio due to lack of performance.
• Short-Term Positioning: Bearish
  • Last Week: No position
  • This Week: No position
  • Stop-loss violated at $41
• Long-Term Positioning: Neutral

International Markets

• Like EEM, EFA continues to drag.
• EFA remains in a downtrend, and failed at the downtrend resistance line.
• While EFA has triggered a buy signal, the failure to advance keeps the market unattractive as a trading opportunity currently.
• If the 200-dma is violated we will see a retest of previous lows.
• As with EEM, we did add a trading position to our long-short portfolio model but it, like EEM, was not performing so we closed it.
• Short-Term Positioning: Neutral
  • Last Week: No position
  • This Week: No position.
  • Stop-loss was violated at $64
• Long-Term Positioning: Neutral

Basic Materials

• “XLB remains confined to a very broad topping pattern currently BUT it continues to hold onto support at the 200-dma.
• The sharp sell-off yesterday comes as data has begun to really address the economic weakness we have been forecasting for a while.
• XLB is set to retest recent lows and the 200-dma. However, with multiple failures at recent highs, the risk/reward for a trade isn’t that appealing. This is particularly the case if economic data continues to weaken.
• We are remaining underweight the sector for now, unless trade deal negotiations appear to be improving.
• 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

Energy

• Previoulsy, we discussed the surge in XLE due to the bombing in Saudi Arabia. That surge is over as oil prices have fully retraced the spike.
• XLE broke below the test of the 200-dma and has now violated the support level we noted on Tuesday at $58. Next support is previous lows.
• The “sell signal” was in the process of being reversed, but that failed as prices didn’t pick up.
• While there is “value” in the sector, there is no need to rush into a position just yet. The right opportunity and timing will come, it just isn’t right now.
• 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

Industrials

• XLI failed at previous tops and has turned lower and broken through initial support.
• XLI is not oversold which puts $72 as the next support level that must hold.
• The recent buy signal is also at risk of reversing.
• We reduced our risk to the sector after reaching our investment target. We have also adjusted 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” but that sector was unable to avoid the selloff yesterday.
• XLK is reversing it’s short-term overbought condition but is getting close to reversing its current buy signal and uptrend line from the 2018 lows.
• XLK held support at $75 previously, and needs to do so again or things could get dicey for the sector.
• Short-Term Positioning: Bullish
  • Last week: Hold position
  • This week: Hold position
  • Stop-loss adjusted to $75.00
• Long-Term Positioning: Neutral

Staples

• Defensive sectors took a hit yesterday along with everything else.
• As noted previously, defensive sectors are an EXTREMELY crowded trade, and we suggested taking profits.
• The “buy” signal (lower panel) is still in place but has been worked off to a good degree. Risk is clearly elevated.
• We previously took profits in XLP last week and reduced our weighting from overweight. We will likely look to reduce further when opportunity presents itself.
• 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

Health Care

• XLV remains on a sell signal but failed to hold support at previous lows.
• XLV has been underperforming as of late and after reducing our position previously, we will look to reduce further if the next support levels are violated.
• We continue to maintain a fairly tight stop for now.
• Short-Term Positioning: Neutral
  • Last week: Hold position.
  • This week: Hold position
  • Stop-loss is at $86
  • Long-Term Positioning: Neutral