Recent Articles in Sector Review

Last month, we downgraded XLRE to an Equal Weight. This month we move to an Underweight. Accumulation Models have weakened further, and we have concerns about Real Estate and Banks going into 2021.

Last month, we upgraded XLB to an Overweight, and downgrade XLRE to an Equal Weight. We generally do not do major changes before an election. Looking at the charts, there is no need to make changes in any event.

We are close to a Dow Theory buy signal, with an all-time high close on Transports.

For some time, we had been looking for a low in July, and while Accumulation Models suggested it would not be a full retest, there was a good chance for a steep pullback. Instead of a pullback, the cycles produced a flat market, and now stocks have started to rally again.

Watch Small Cap and the Transports – those economically sensitive indexes have started to improve but this needs to continue for a strong market in the second half.

The weekly stochastic for XLI is a sell recycle, and the daily stochastic is coming down to oversold. This normally suggests consolidation, but the move above 70 improved the chart enough to upgrade it. The accumulation model on XLI remains one of the stronger units.

The market could retest the lows but is trading better. Watch small cap. If small cap performs better, then it may forecast less of a recession than consensus estimates.

Our Over Weights remain XLV and XLRE. These are both strong Accumulation Models. We had thought about downgrading XLRE, but last week’s performance has been very strong in accordance with the accumulation models, so we will hold this for now.

Our underweights are XLE and XLB. The reason for the underweight in XLE is that the sector has one of the weakest Accumulation Models and has weakened. XLE has broken support and still has no buy indication. XLB has broken the December 2018 low, and the accumulation model has weakened.

XLV is a consolidation, and it is a very “newsy” sector with the 2020 elections. It has weakened since Senator Bernie Sanders has won some primaries.

SPY has continued the 2019 rally into January 2020, per our forecast. Breadth indicators have improved, but sentiment remains a concern. Small Cap has moved above the key 82 area on IJR, and there is an accumulation model buy signal on Transports. Our major trend system is positive at 3/1, with Small Cap being the only negative index.

Our major trend system remains neutral. We usually make no major changes at yearend, and our only change in this report is to swap TMUS with VOD.

Our overweights are still XLF and XLRE. These are both strong Accumulation Models. If we are making a mistake it is that XLRE is too defensive but both XLRE and its Accumulation Model have continued to hit new highs.

Breadth indicators have come down, but sentiment remains a concern. The market has consolidated and may be ready to resume the advance.

XLF may have an inverse Head and Shoulders, along with XLI. There could be rotation into these. This is potentially very strong for these sectors

We still have concerns that Small Cap and the Transports are lagging, but there are signs this will improve in the second part of 2019. Our major trend system remains neutral.

SPY has tested the upper end of our projected high range for 2019. Breadth indicators are overbought, and sentiment remains a concern. The market has corrected and bounced back.

We are seeing some leadership change in IYW, which is healthy. The Accumulation Model has finally started to improve.

IYZ traded through 30, finally, but is below that area once again. This may not get going right away, although Accumulation Models have improved. This sector may have bottomed, but there looks to be less upside potential than in other sectors.

XLRE has held the break out and the Accumulation Model has hit new highs. The reason for the Under Weight in XLE is that the sector has one of the weakest Accumulation Models and is at resistance as oil moves into a seasonally weak timeframe.