I concluded last week's comments with this opinion: "Markets will most probably come back down early next week. It all depends on the time it will take to run the margin calls on Monday (half an hour?)"
This statement proved about 100% wrong: the bounce was very strong and certainly lasted more that what is needed to run margin calls. It felt like March 2009, when QE1 forced an epic short-covering move. The main difference with QE1 is that in March 2009, prices were very low AND the Fed was really buying.
Today, we might question the potential for a continued bounce (Price/Value) in an environment characterized by the Fed's inaction and passivity (more data needed, more time needed to observe, etc.)
The other side of the coin is that funds that had positioned themselves for an imminent rate increase may not be done adjusting to the long side. Hence, although still "short" oriented, I am much more prudent now than last week.
How should we handle the coming week?
We are short-term overextended, but this is options expiration, which carries a positive bias. In other words, there is a good chance that a trading range will develop.
In such a case, we should look at some hypotheses and follow those that are data supported.
1. If the Fed is not going to raise rates, then dividend-offering defensive sectors should do well.
Since issuing a buy signal early in September, REITs and VNQ have gained 20%, which is really good for a defensive sector. So yes, that statement looks to be data supported.
2.The bounce in energy is overdone. Energy will pull back this week.
This is what the XLE MF is telling us.
The Oil Integrated sector (XOM, CVX) has attracted good money and is now overextended, but it is hardly falling here.
On the other hand, the Oil Sands sector (IMO, SU, CNQ) is not doing well at all: large investors are taking advantage of the bounce to sell shares. It might be "Canada specific" (For example: new taxes.) or it might show that there is no trust in a long lasting oil bounce.
3. With the bounce in oil, coal should also do well.
Not really!!
We can see that the coal MF has now turned negative again.
CNX is probably a short here.
Coal is a big component of the materials sector XME, which shows a topping pattern here.
Steel companies such as STLD/NUE seem to be running on fumes, which is to say that they are up because the materials sector and the market are up, but for how long?
4. With the uncertainty in the energy and materials sectors ready to return to the markets, the safest buys are probably in the tech sectors.
Indeed, many tech sectors are attracting money and a few tech stocks could probably move higher on genuine buying (not just short covering).
In the Software enterprise sector, QLIK, ADSK, WDAY, MBLY are interesting (ADSK is somewhat extended now).
On the Software security side, SPLK, FEYE or the HACK ETF might move higher.
Conclusions:
It is still possible to make money in the current environment, but I believe that carrying a balanced portfolio is the best for now. There are enough "stories" to find good opportunities on both sides of the market.
There are still some other stories such as
- the solar panel issue with the Chinese competition and the end of state subsidies
- the biotech sector that has been shaken by Hillary's campaign against high prices
Maybe for another comment.
