Sectors Poised to Outperform: Telecom, Banks, Energy, Industrials, Miners

06/05/2017 2:51 am EST

Focus: STRATEGIES

Ziad Jasani

Managing Director and Partner, Independent Investor Institute

Sectors poised to out-perform this week are: Telecom (IYZ), Financials (XLF, KBE), Energy (XLE), Industrials (XLI), Miners (XME), and Materials (XLB) asserts Ziad Jasani, Co-founder of The Independent Investor Institute, Toronto, in his weekly Trader commentary and video. 

Our commentary today includes the Global Risk Assessment, analysis of S&P 500 trading levels and short-term trade ideas for the week of June 5.

Global Risk Sentiment: Risk in general remains expensive from a longer-term perspective (Bonds less expensive).

Sentiment in the shorter-term is leaning Risk-On; defensive asset classes are largely dislocated and expensive on annual routines while over half of higher risk asset classes have become dislocated and cheap.

Most of the higher sensitivity and commodity-linked spaces are on the cheaper side of annual routines, which allows for any bullish global macro catalyst to be received eagerly.

The iShares Core S&P/TSX Capped Composite Index ETF (XIC), iShares Transportation Average ETF (IYT), iShares Russell 2000 ETF (IWM), and PowerShares S&P 500 Hi-Beta Portfolio (SPHB) issues present as dislocated and cheap on annual relative routines, arguably depicting Trumpflation is over, but simultaneously primed for a bounce on positive Trump headlines.

US Financials SPDR S&P Bank ETF (KBE) also find themselves on the cheap short-term and would require “good news” on Trump’s plans to re-direct money flows away from bonds. Short-term sentiment is fully linked (and leveraged) to whether Trump’s fiscal spending plans & tax reform can happen, while markets remain “held-up” at highs by the Eurozone & Technology spaces.

Major Index Direct Price Regression
US Markets have moved back to expensive on annual routines, while International Developed Markets (EFA) remain 2 Std Dev+expensive (and EEM 1.5 Std Dev).

The TSX remains dislocated and cheap. This is an atypical market configuration that lends itself to short-term bounces in North-America, but under-performance from the rest of the world. This configuration also suggests entrenchment of a loss-of-faith in Trump’s growth plans.

A bullish confirmation on tax reform and infrastructure spending is required short-term to hold the market up at new highs, along with a decline in geo-political risk, especially now as Q1 earnings are in the rearview mirror.

Last week Eurozone Markets along with the Nasdaq and Russell 2K out-performed the world into the week’s end. Emerging Markets have gotten complacent near highs. US markets are on the dislocated and cheap side of annual routines with the world, suggesting any bullish Trump news would see the US out-perform.

The TSX under-performed the S&P 500 over the last month and a half on Oil, Tariffs and Mortgage Markets. With Trumphoria largely priced in, and recent economic data softening, we see too much expense in the Eurozone Far East & Australasia to remain holders, but would favor trading short-term in the US temporarily, while awaiting a pull-back or correction to put longer-term capital back to work. Shorter-term risk held within the TSX is viable above 15,400-360.

S&P 500 Trading Levels
The March 1, 2017 break-out on Trump’s Feb. 28 address to Congress was lacking “good” fundamental behavior – and was fueled by massive short-covering. Yellen’s dovish rate hike March 15 sparked a bounce in risk, but one that needed better growth data to maintain. The hike helped bonds more so than equities (short-term).

The March 21 break-down in US Financials (Banks) took the S&P 500 below its short-term sell-signal level of 2,370-60; but the Bulls defended their turf.

The French election (not Q1 Earnings) pushed the S&P 500 back to re-test March 1 highs with a limp-out on May 9 and 16, but a break-out wasn’t successful; and the growth outlook remains challenged but risk remained supported by positive earnings flow.

Another limp-out to new all-time-highs came on the May 24 FOMC Meeting Minutes that left the back door open to slower rate hikes, followed by a break-out on the ADP jobs report number on June 1 to new all-time highs.

The S&P 500 is being held up by Technology Select Sector SPDR Fund (XLK), Healthcare SPDR S&P Biotech  ETF (XBI) SPDR S&P Pharmaceuticals ETF (XPH), Consumer Discretionary SPDR ETF (XLY) and Defensives Utilities SPDR ETF (XLU), Consumer Staples Select Sector SPDR Fund (XLP), iShares Dow Jones US Telecom ETF (IYZ), Real Estate Select Sector SPDR Fund (XLRE) which have all gotten very expensive–Financial Select Sector SPDR Fund (XLF) and Energy Select Sector SPDR Fund (XLE) would likely have to bounce to keep the S&P 500 held up at these highs.

However, a re-ignition of Trumpflation is becoming less and less likely (politics holding Trump’s plans back), coupled with growth being an issue June 2 official jobs data missed forecast sorely.

It’s now up to the Federal Reserve on June 14 to open the back door wider for a slower flight-path on “normalizing” rates. US markets remain relatively cheaper on annual routines vs. iShares MSCI EAFE ETF (EFA) or iShares MSCI Emerging Markets ETF (EEM) if the S&P 500 Bulls regain control of the tape, it is likely led by Financial Select Sector SPDR Fund (XLF), SPDR S&P Bank ETF (KBE), iShares S&P/TSX Capped Energy ETF (XEG), Industrial Select Sector SPDR Fund (XLI), Materials Select Sector SPDR (XLB), Healthcare SPDR S&P Biotech ETF (XBI), SPDR S&P Pharmaceuticals (XPH) and Telecom iShares Dow Jones US Telecom ETF (IYZ) – while Technology Select Sector SPDR Fund (XLK), Consumer Discretionary Select Sector SPDR Fund (XLY), Utilities Select Sector SPDR Fund (XLU) and Consumer Staples Select Sector SPDR Fund (XLP) are more likely to under-perform.

If support at 2,400 breaks, the most vulnerable sectors in order of downside risk are Technology (XLK), Discretionaries (XLY), Utilities (XLU), Staples (XLP), REITs (XLRE) Financials (XLF, KBE), Mining Stocks (XME), Health Care (XBI, XPH).

To start this week (June 5) we anticipate indecision but the highs to hold, followed by a swing-high forming late in the week taking us back to around 2,400.

S&P 500 Sector Positioning (Out/Under Performance):
• Sectors poised to out-perform are: Telecom (IYZ), Financials (XLF, KBE), Energy (XLE), Industrials (XLI), Miners (XME), and Materials (XLB).
• Sectors poised to neutral-perform: Healthcare (XBI, XPH).
• Sectors more likely to underperform: Staples (XLP), Utilities (XLU), REITs (XLRE), Discretionaries (XLY) and Technology (XLK).

View the Independent Investor Institute trading ideas and strategies videos here

  1. Into The Open – June 5th, 2017 - Link to stream 
  1. Into The Open – June 5th, 2017 – Link to download video
  1. Into The Open – June 5th, 2017

This 40min workshop covers short-term trading ideas and longer-term portfolio allocation strategy for global equity markets with a focus on North America (Recorded live on Monday June 5, 2017 from 9:20 am-10 am EDT). Ziad Jasani, the Head Swing Trader at the Independent Investor Institute, will help you navigate through the week ahead in Equities, Bonds, Currencies and Commodities using a global-macro approach to decision-making. For more information about the Institute visit www.educatedtrader.com or contact Ziad directly at ziad.jasani@educatedtrader.com requesting a complimentary trial of his online trading classroom.

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