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In case you had missed the launch back in early January, I wanted to highlight a new and original product from Wolfe Research – ‘Follow the Money’ or ‘FTM’.
As the market continues to reward last year’s biggest losers to start the year (a trend which is unlikely to persist), I wanted to flag Chris Senyek’s note from yesterday – “An Extreme ‘Low Quality’ Rally”. Each month, Chris and his team publish Senyek’s Long Stock Screens and Senyek’s Short Stock Screens, featuring their favorite long and short ideas across many investment styles. In January, top performing stock baskets were centered around Low-Quality themes including High Pension Risk, High NOLs, Low Earnings Quality & High Short Interest, Decelerating EPS & Low Free Cash Flow Yield, and High Capex & Low Free Cash Flow Yield.
As the past 6-weeks have proven, counter trend rallies can be painful - especially when coming out of a dramatic oversold condition and a little love from the Fed. With the S&P 500 now a whisper away from its 200-day moving average, the chart below bears close watching. Overbought signals can be a sign of momentum when the underlying asset is trading at fresh highs (early ’17), it’s when they develop at lower highs or beneath resistance that my skepticism grows.
Like almost everything else in this market, the start of the year has helped to normalize the pain experienced by most of the charts in December, with indices, sectors and stocks all reverting right back into heavy resistance zones. Health Care has had strong leadership, but the sector has given back a decent chunk of its outperformance over the past month as investors rotated to the beaten up, more cyclical segments of the market. This has pushed the sector’s relative performance down into a solid support level, and if my broader concerns about risk assets come to fruition, I would expect relative performance to regain its mojo. Equipment & Supplies, Life Sciences & Tools and Providers & Services (ex-Distributors) remain leadership but selectivity is key when flipping through the charts of pharmaceuticals or biotech. Among the many trends that have broken and bounced right back to the scene of the crime is that of style. Growth has regained half of what it lost to value, and with the former largely influenced by biotech and the latter pharma, the call on style comes down to a bet on these two groups.
The first real test for any asset class coming out of a deeply oversold environment is how it responds to its first overbought condition. Persistent upward momentum in the face of this headwind is usually quite bullish and, in many instances, signals the start of a pending trend change. It’s when these rallies are rejected at resistance that the downtrend in place is confirmed. I mention this because Industrials are starting to feel the effects of their overbought condition as multiple resistance points lay overhead. People will point to CAT’s disappointing quarter as the impetus for today’s action, but it’s worth noting that a few charts in today’s note were suspect of this recent oversold rally. With the internals entering overbought territory (% over 50-day), equal-weight indices have been lackluster off the lows, the yield curve remains suspect and excluding the rails, transports remain dubious.
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