These Sectors Are Poised To Lead The S&P

Yesterday was a good session with positive market breadth, but the volume was light. Although the winners had a 2:1 lead on the losers in the NASDAQ, it was clear the same old names benefited.  

The market exhibited true grit yesterday, as it fended off both the early efforts to pick on Wednesday’s drubbing and the same kind of news that financial media used to spark the selling frenzy.

• Disney is delaying the opening of Disneyland
• Texas is delaying some reopening plans
• Apple closed seven stores in Texas                                                                                         

Just 24 hours earlier, these headlines would have been tossed into the fire like kerosene. However, a day later, investors wised up to the notion that reopening the nation is fraught with challenges, delays, and setbacks. That said, a properly stoked headline – such as a major state restoring full lockdown mode - would hit the stock market. But there are other issues, including the need to spread the buying wealth.

It’s not only the large gap between winners and losers; the average loss against the average gain is the size of the Grand Canyon. It’s very enticing to buy the losers, assuming they are oversold.

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Yesterday, there were bigger winners than Technology, as Energy and Financials took off with the latter- essentially carrying the entire market for most of the session until late buying lifted all sectors.

Potential Rotation

Which Sectors are Poised to Lead?

There are three buckets for the eleven S&P 500 sectors:

High-Flyers

These sectors are well above the 50- and 200-day moving averages, and automatically attract both buyers on dips and chasers of growth. We need these sectors to remain firm, but they don’t have to be runaway trains.

• XLC Communication Services
• XLY Consumer Discretionary
• XLK Technology

Exhibiting Resolve

These sectors held their 200-day moving averages yesterday, and from time to time, have looked ready to take off. These are the areas that could outperform in the second half of 2020. I’m very focused on XLI.

• XLRE Real Estate
• XLI Industrials
• XLV Health Care
• XLF Financials
• XLE Energy

Fallen & Can’t Get Up

While these are generally ‘safe haven’ names, they have largely gotten out over their skis. If these names lead the way, it means the broad market is in trouble. Since June 8, both have crashed below both their 50- and 200-day moving averages.

• XLP Consumer Staples
• XLU Utilities

Stressed

Banks zoomed into the close on hopes a watered-down Dodd-Frank Act would be part of the Fed’s Stress test; instead, those not-so-veiled threats from Vice Chair Randal Quarles last week are the headline:

• No buybacks in the third quarter
• Dividends cannot exceed the second quarter

That news immediately sent shares lower in the financial sector with JPMorgan (JPM) and Goldman Sachs (GS) taking the biggest hits.

The Federal Reserve took pains to suggests banks would still be viable:

The results of this year’s Dodd-Frank Act stress test (DFAST 2020) suggest that, in the aggregate, the 33 firms subject to the supervisory stress test would experience substantial losses under the severely adverse scenario but could continue lending to businesses and households, due to the substantial buildup of capital since the financial crisis. In the severely adverse scenario, the aggregate common equity tier 1 (CET1) capital ratio would fall.

Aggregate losses at the 33 firms under the severely adverse scenario are projected to be $552 billion. For the 18 firms for which stress test results were disclosed both last year and this year, total losses under the severely adverse scenario are $433 billion in DFAST 2020, compared to $410 billion for the same 18 firms in DFAST 2019.

By the way, after the close, Uber (UBER) announced it was abandoning its dream of adding financial services to its long menu of services. I’m not sure how it was going to work. Perhaps they were going to focus on day traders placing orders during trips.

Portfolio Approach

Yesterday, we added a new position in Energy to our Hotline Model Portfolio and lowered Cash to 10%.

Today’s Session

The markets are under pressure as yesterday's winners, the banks and NIKE(NKE) both came up short overnight.

In economic news:

• Incomes declined less than anticipated, but spending rebounded less than consensus
• Income -4.2% against consensus of -7.0%
• Spending +8.2% against consensus of +8.7% (prior record +2.8%)
• Savings $4.12 trillion down from $6.15 trillion
• Savings rate 23.2% from 33.2%