InvesTech Stays Bullish, but Defensive

08/15/2017 2:53 am EST

Focus: STRATEGIES

James Stack

President, Stack Financial Management

With the blue chip indexes continuing to climb to new highs in early August and the DJIA crossing the 22,000 threshold for the first time, the market and expectations are overheated and frothy in the near-term, explains money manager Jim Stack, editor of InvesTech Research.


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Also, based on historical bull market patterns, the major indexes are overdue for a correction and there is a good chance that a pullback will occur during the seasonally weak summer period that extends through October.

At the same time that the economic evidence remains firm, our technical indicators are showing some preliminary weakness.

Based on this picture, we are trimming the most appreciated sectors for now with the probability that there may be an opportunity to reinvest at a more favorable level if a correction occurs (and bearish warning flags remain absent).

Those who hold individual stocks in their portfolios should also consider taking some profits at these levels. These changes bring our invested allocation down to 80%.

Equity markets retreated this past week, with the Dow Jones Industrial Average (DJIA) and the S&P 500 (SPX) off -0.3% and -1.2%, respectively. The technical picture has weakened slightly, with breadth, as measured by the Advance-Decline Line, moving lower.

At the same time, divergences are emerging in the Dow Jones Transportation Average (DJT) and the small-cap Russell 2000 Index (RUT). Technology stocks have also been declining, with the FANG Index now -6.2% below its recent peak.

Facebook (FB), Amazon (AMZN), Netflix (NFLX), Google/Alphabet (GOOGL).

Meanwhile, a stable growth outlook for the economy remains in place. The Bloomberg Consumer Comfort Index rebounded to a 16-year high and the NFIB Small Business Optimism Index gained ground.

There is also no sign of inflation as both the Producer Price Index and the Consumer Price Index for July were lower than economists had expected.

Strategy: We are advising the following changes in the InvesTech Model Fund Portfolio:

1) Reduce the position in the Technology Select Sector SPDR ETF (XLK) from 19% to 16%.

2) Also, reduce the position in the Consumer Discretionary Select Sector SPDR ETF (XLY) from 8% to 6%.

These changes to the Model Fund Portfolio reflect our concerns regarding high valuations and a softening in the technical picture during this seasonally weak period. The Model Fund Portfolio is still positioned to take advantage of this aging bull market but at a slightly more defensive 80% allocation.

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