Looking Ahead to Q3

I hope everyone had a great July 4th holiday. While it was a week ago, I took some time off from work and the markets to relax and clear my head the rest of the week. Now as we are underway into Q3, I want to touch on some my thoughts and themes I see in the market.

1) Starting off, from any sort of longer time horizon things look great. While it is easy to get caught up in short-term moves (and I am guilty of that), zooming out to the weekly and monthly charts I find it very hard, if not impossible, to be bearish.

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I get it, there are millions of market participants around the world who all approach the market from different walks of life and styles of analysis, valuations are “high”, the world is going to end, etc. At the end of the day, all of our portfolios either rise or fall based on one constant: Price. Ride it or fight it.

2) In my Q2 outlook, I looked at the relative weakness of many indexes relatives to the S&P 500. Many of those charts still remain but when you look at them on an absolute basis, there is nothing wrong.

For example:
-Micro-Caps are hanging out near ATHs
-Small-Caps are hanging out near ATHs
-Mid-Caps are hanging out near ATHs
-Equal-weight S&P 500 is hanging out near ATHs
-Not to mention many sector specific equal-weight’s are just fine or breaking out            relative to their cap-weighted
-Transports closed at a new ATH last week

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If we have a full expansion of different capitalization stocks rising this can only be a positive.

3) Sector Breakdowns & Rotation

Sector rotation is a part of any well rounded bull market. When Tech and Semi’s saw some distribution, Healthcare, Industrials and more recently Financials stepped up.

My brief thoughts on Tech are:
The group has been a monster whether you’re speaking to the NASDAQ or Semiconductors, so this pullback is perfectly normal – it just may not feel that way due to this low volatility market. I think this is bringing some buying opportunities in a handful of names. AMZN and GOOGL struggling with 1,000 level is expected but warrants some caution.

XLV which has been consolidating at ATHs for over 2 years now has resume trend. Healthcare makes up 14% of the S&P 500.

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Even Biotech has come back from the dead:

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Looking at Financials, the H&S top everyone thought was in play ended up going the opposite route. IMO I think this could be huge for the group overall. Financials make up 14% of the S&P 500 and not to mention 20% of the Russell 2000.

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KRE is also holding above its 2007 ATHs.

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Industrials are another important group I’ve begun seeing show up in my new high scans. This is fitting with the Transports hitting ATHs. Industrials make up 10% of the S&P 500.

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Not to mention on a relative basis they are going for a huge breakout:

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What I have taken even more notice of over the past two weeks is the strength in certain home-builder stocks. If the world was ending, I don’t think this group would be breaking out. Here is the Home Construction ETF ITB breaking out relative to the S&P:

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Last but not least are some of the most interesting charts to me lately – the relative strength of ‘defensive’ sectors to the S&P 500:

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One would expect Staples, Utilities, Real Estate and Telecom to be outperforming if the market was weak right? Zero of these charts look bullish, actually the complete opposite. This is something to keep an eye on in regards to risk appetite.

So to recap:
Leading: Technology, Financials, Healthcare, Industrials
Lagging: Staples, Utilities, Telecom, Real Estate, Energy, Materials

Just comparing the lists above tells the story. So if Tech can get back on its feet with Healthcare, Industrials, Financials taking on rotation now we will continue to be in great shape.

———————

With earnings season underway soon, lets see how sectors react to their reports for further confirmation of where we are headed. Thanks for reading.

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