Good morning! This week we are going to mainly show charts and keep explanations direct and to the point.
WEEKLY MAJOR INDEX PERFORMANCE
This week the rotation we expected occurred from tech to value (compare the NASDAQ vs Russell 2000, Dow Jones, and S&P 500 performance). The real question is, “Can value-names keep the indexes afloat while tech growth names attempt to build bases?” Up to this point, the S&P 500 has held key levels. We gave the forewarning last last week that we would begin to trim some names in the momentum leaders in the “stay-at-home” playbook. This worked out well. In short, we kept our value-names on and sold almost all “stay-at-home” names. We are underweight and have a lot in cash at this point. We would prefer to see better risk-to-reward. With this said, this doesn’t mean there aren’t opportunities as many of the momentum leaders attempt to form bases.
WEEKLY SECTOR PERFORMANCE: Healthy Rotation
The above gives a deeper-dive into the full rotation. Communication software and Technology took a much needed breather. The question is whether they form bases or need more time. We continue to watch tech names to see how they react. Friday, was the start of building some bases in a few names, but this might require some time. In a perfect world, it would be healthy for the Industrials, Utilities, Consumer Staples, and Financials take the lead for a bit to give the overbought Technology and Communication groups time to digest gains.
MACRO PERSPECTIVE – S&P 500
As you can see from the above, rotations can be healthy and keep indexes afloat and reduce downside if you’re well diversified. On the Moderna vaccine news, cruiselines, travel stocks, banks, and gambling stocks are going to get a bid. These names are “trades”; not “investments” in our methodology. We are at top of range near the $3233 level. Does it breakout or need more time? Personally, even if there is a breakout, there are warning signs where risk/reward may not be worth it. It becomes a question of whether we push hard for a quick 2-3% upside in an index or protect the gains we have had. We tend to lean a bit more cautious based on several signals.
THE LEADERS – NASDAQ 100 – $QQQ
As you can see, we saw a healthy dip during a time where we saw RSI (Relative Strength Index) reach heightened levels well above 70. Early this week, we sold into the rally to take gains in this space. In general, these are the names we want to participate in as we believe these names start rallies and end rallies. So when we see these dips, we are anxious to put more to work, but we need more confirmation. While I wish we would see a test to the 50-DMA at $240.57, I am not convinced this happens unless death count increases and more states shut down on a second wave.
VALUE VS. GROWTH – Long-term
It is pretty clear as to why I am not a long-term “value investor”. There are times to buy beaten down names, but they often don’t last long as indicated by the long-term value vs growth chart above. This past week was a time to trade a few of these names and dump. Value names are a trade; not an investment in our investing methodology. If case count continues to increase these value names will have a hard time holding gains. Conversely, they have room to run on positive news. Squint and you can see that value-names the past week held us up.
VALUE VS. GROWTH – Short-term
This is a short-term version of the value vs. growth chart. As you can see, it was a solid week for value-names, which ultimately advanced the S&P 500, DOW, and Russell 2000 indexes. Hopefully, value-names can show strength a little longer or tech decides to rally again. Personally, I believe this will be shown in the coming week.
FEAR GAUGE: $VIX – Broader Scope
Chalk this chart as a positive! The Fear Index struggles to hold above 30. Remember, we want to see a lower fear level (want a lower number). Seeing this close below the 200-DMA isn’t a bad thing. Ultimately, don’t expect to recover in a day. In short, expect more chop ahead.
FEAR GAUGE: $VXN – Nasdaq 100 Fear
Compared to the chart above, it is evident we saw more volatility/fear in the Nasdaq this week. The good news is that we see some of these names attempt to build bases! Once again, a rotation back to tech names likely needs to happen for a continued rally if case count is increasing.
WEEKLY PERFORMANCE: Large-cap growth leaders
Certainly not a horrible week. Simply showing that market might be range bound if these do not continue to rally.
WEEKLY PERFORMANCE: “Stay-at-home” stocks
If case count decreases, expect these areas to continue to struggle. If case count increases, expect these to get bought. Ultimately, momentum leaders might need to establish bases quickly if case count increases OR we likely see a more notable decline across the broader indexes.
PUT/CALL RATIO
This week we saw as low as 38, indicating “complacency” in the market. This is not an immediate sell signal. We trimmed a few of our high fliers and it paid off. Overall, there remains complacency, though FOMO and large amounts of cash continue to drive us higher across the broader S&P 500 index.
THE BOTTOM LINE
Many of the names we tend to gravitate toward in the growth/momentum space took a breather and are attempting to form bases. Ultimately, I would like to see value-names hold us up longer, but I don’t expect to see this. Based on price action, it appears we either have the growth-names build bases and rally again, or we see a pullback in the indexes. Price action remains strong for the time being. Seeing value hold the indexes up while the traditional leaders took a breather is often how rallies can continue further than most would expect. We remain quite cautious as the risk to reward remains questionable. There are opportunities though the question is whether the opportunity is worth the risk. We remain underweight and nimble during this period and continue to take profits. If the S&P 500 breaks $3233, don’t be surprised if we test all-time highs near $3400. Could it be a reoccurring theme that we gap-up on Monday? I wish it were that simple.
Overall, earnings haven’t been horrible though selectivity and remaining nimble are keys in this environment. The fact that the market didn’t give up on Netflix’s $NFLX’s plunge overnight Thursday, was quite telling in my mind. Despite all the drama in the news, the S&P 500 has remained in the tight range. This week we will watch to see if $3233-$3240 breaks-out. If it does, there could be some additional upside. Do not be surprised if we need to digest some gains across the broader market. It has been an amazing rally. This is not the time to get greedy and hurt your P&L. We keep some positions on and take the gains in some winners to reduce risk.
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DISCLOSURE
STATEMENT
This post is for informational use
only. The views expressed are those of the author, Jonathan M. Gurney. This material
is not intended to be relied upon as a forecast, research, or investment
advice, and it is not a recommendation, offer or solicitation to buy or sell
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Opinions and statements of financial
market trends that are based on current market conditions constitute judgment
of the author and are subject to change without notice. Statements that
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of the markets may be considered forward-looking statements. Actual
results may differ significantly. Any forecasts contained in this
material are based on various estimates and assumptions, and there can be no
assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past
performance is no guarantee of future results. All
information referenced in preparation of this material has been obtained from
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