Video View from Toronto: Defensive on S&P 500, Short the TSX this Week

11/14/2017 11:50 am EST

Focus: STRATEGIES

Ziad Jasani

Managing Director and Partner, Independent Investor Institute

S&P 500 outlook: The setup for the Bulls is challenging this week. Overall, we maintain a highly defensive posture. We’re happy to play inverse/short the TSX over this week, but not interested in getting long, writes Ziad Jasani of the Independent Investor Institute.

Watch Market Strategy video session recorded Monday, Nov. 13:

chart

S&P 500 detailed notes

Tailwinds must blow strong to keep Mr. Market (S&P 500) above 2,580 and pointed towards 2,618 this week. In particular, the House and Senate must “play-nice” and keep Trump’s tax reform on-track, inflation data this week (U.S. PPI, CPI) must deliver in line with forecast, Commodity-Markets (Oil in particular) must hold-the-highs, Bond markets must brush the Junk scare to the side, and enough fresh-buyers must be attracted overall.

The current debate over tax reform (SALT deductions) is far from over, U.S. inflation data has a sideways to downward trajectory (including the significant miss on wage inflation Nov. 3).

Oil is already showing signs of fracturing at highs pointing towards a re-trace to $55 (5 days of indecision under resistance).

Bond desks are going to have a much bigger challenge to sell credit this week, and an over-bought market that is dislocated and expensive (52-week routines) is less likely to attract droves of fresh buyers.

The setup for the Bulls is challenging this week, to say the least. Overall, we maintain a highly defensive posture entering this week of trade.

If the S&P 500 (SPX) is able to close the week above 2,590 we are then likely to project up to 2,618; however, a close below 2,580 keeps the draw-down (-1% to -3%) thesis intact.

Sectors with the most down-side or under-performance risks are: Materials (XLB), Energy (XLE), and Technology (IYW, XLK) – totaling 33.5% of the S&P 500’s market cap weight.

Utilities (XLU) and REITs (XLRE, VNQ) are setting up for swing-high formations – totaling 6.1% of the S&P 500 Market-Cap.

Consumer Staples (XLP) – 7.9% of market-cap – have enough bullish momentum to rise and test its 200-Day Average.

Telecom (IYZ) – 1.9% of market-cap – is setting up for a swing-low, but remains in a down-trend. Bio-Tech (XBI) & Pharma (XPH) are setting up for swing-lows and are still our favorite cyclical spaces to trade the upside.

Industrials (XLI) and Financials (XLF, KBE) – totaling 24.7% of S&P 500 market-cap -  have already given us major swing-highs and are likely to give us no more than dead-cat-bounces; not taking us past recent highs.

Consumer Discretionaries (XLY) – 11.9% of market-cap – remains bullish but is highly over-bought.

We are interested in selling down the spaces with the most risk or in swing-high setups, and not willing to play with more than short-term capital on charts setup for swing-lows.

TSX detailed notes

The S&P/TSX Composite (TSX) is dislocated and expensive on 52-week routines and relative to the S&P 500.

Short-term technical tools (RSI, MACD) point the TSX down.

The nascent up-trend channel starting ~ Oct. 12, 2017 was perforated on Nov. 10 (sign of weakness).

Financials (XFN, ZEB), Industrials (ZIN), Materials (XMA), and Energy (XEG) -- roughly 70% of the TSX market capitalization -- are in expensive to very expensive territory on long-term routines (back to March 9, 2009).

Staples (XST), REITs (XRE) and Telecom present with long-term relative value – 11.3% of TSX market-cap.

In the “now” Financials (XFN, ZEB), Industrials (ZIN) and Energy (XEG) have confirmed swing-high formations – only dead-cat bounces would be expected (hard to trade, and easier to sell into on your longer-term holdings in these spots).

Materials (XMA, XGD) are waiting on a swing-low from Gold (likely Nov. 14 onwards).

REITs (XRE) have gotten highly over-bought and are in a swing-high setup.

Telecom (BCE) and Staples (XST) are still attractive to momentum traders, but not in a swing-low (we picked them up Oct. 27, and are now in protection mode).

Utilities (ZUT) are setting up for a swing-low, but perilous until we have yields pressured down.

Overall, the picture for the TSX is negative, with an expected move down to 15,400-360 (support) that would trigger on a close below 15,943.

We’re happy to play inverse/short the TSX over this week, but not interested in getting long this market.

Join experts at the Independent Investor Institute for a three-hour deep dive on markets Saturday, December 2, 12 pm (EST). The session will be held online, click this link to register directly: CLICK HERE or send Ziad an email with your request: ziad.jasani@educatedtrader.com

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