In this week’s Alpha Over Beta Market Outlook:
Record dash pushed the S&P 500 to record levels of 3100 and the Dow Jones is over 28,000. The S&P 500 was up almost 1% for the week. The Dow Jones industrial average was over 1% for the week and the NASDAQ was also almost 1% for the week. All of them setting new records for this week.
Fundamentals
Most of this week’s gains came on Friday. The White House economic adviser, Larry Kudlow said that phase one trade agreement was close to being reached and he means in the US/China agreement. So, the US/China trade wars that started over two years ago are starting to get a positive turn and we seem to be getting some good news regarding the direction of the relationships between those two giants: the US and China. And we see that now we have phase one agreement and it’s close to being reached.
So, on Friday the Dow Jones gained 222 points or 0.8%, almost all of its performance for the week and the S&P jumped almost 0.8% to end the day at as we said 3,120. So, the US and China trade talks are propelling the major averages to fresh record highs.
That’s the fundamental front. What we see is a market that’s been sitting and waiting for good news from the US/China front and we see that the White House is delivering its promise for some positive news regarding that front and it’s starting to get a good positive turn and this is certainly having a good effect on the performance of the market.
So, if we have we no more bad news regarding China and the US, I really believe that the next weeks are going to hold some good positive news regarding the US/China front and this is what we believe to be from quite simple deduction, Meaning, President Trump is looking to reelect in November. That’s almost a year from now. He has one year to have major impact on the market so he can turn back and say, “Look, this performance is my performance. I’m responsible for the upturn in the market.” And the upturn in the market can only be if they reach some agreement with China.
So, what we believe to be is the high probability scenario is where Trump pushes for an agreement that’s going to be achieved along the next six to eight months and most of it is going to hold good news and those good news are going to push the markets to record high and the economy to record high. And at the end of the day, the thing that interests the most is the economy, the state of the economy. The US economy and for the US voter what’s important is the US economy and its performance and the market is certainly a gauge for that.
And so there is high motivation in the White House to reach record high as we push through November 2020. So, we’ve just seen the first mark of this good news that I think is going to increase as we get close to November 2020 and this is certainly going to lift the market to new highs and we’re going to see positive performance over the next 12 months. This is our high probability scenario for the next 12 months. So, that’s fundamentals.
We believe this to be also for next week. Next week economic forces and fundamental forces are going to be what’s left of the earning season. Companies that haven’t yet reported earnings and most of the season was quite all right. We spoke about that in previous podcasts. And of course, more news from the US and China front. Once they sign the agreement, we’ll see how the market’s going to react to that because the positive news is already banked into the prices so we’ll see about that.
It’s going to be high volatility day on the day they actually sign, That’s for sure, so pay attention to that day. Once that day arrives, we should really be nimble with our open position. Don’t hold them too long. If you have any open positions which are sensitive to volatility, you should close them on that day. If you see that the market is reacting negatively to that news. Now, it’s not negative reaction; it’s just going to be a correction. There’s not going to be a negative reaction to the day they sign the agreement because it’s good news for the market.
Technicals
Let’s talk about technicals. If we look at technicals, you can see that the market has reached its highs pushing from the lows of the 288. Now, the break out — we have forecasted the breakout of the 302, 303 level and once the market broke that, we saw that the market is continuing to climb up without even looking back. But we have red flags here because looking at technical analysis; we think and believe that for the shorter term the market is overextended. This leads us to be cautious about opening new long positions.
We don’t say that the market is going to crash from here, but what we do say is that you have to be cautious about opening new long positions. You should be nimble and the stop loss should be really tight and we do not recommend opening long positions with the entire positions. Just to open a third or a half of the planned position and see where the market heads. And if it goes against you, just close them as fast as possible using a stop-loss order.
So, the market really did make a nice move to the upside, but we think it’s a bit overextended. If you look at the RSI, levels of RSI are closing in overbought level and levels of ATR, average true range, are extremely low in volatility so we do expect the next week or two to be challenging with correction in mind. Maybe even a retest of the 303, 304 levels as we spoke before.
Now, we’re not so sure that it’s going to be that low, maybe it does but it’s definitely going to retest at 303, 304 if the market corrects. So, what we should really do right now as investors is reduce the risk, be nimble on our long open positions, wait for another opportunity to enter, As we forecasted, this leg is going to continue to the upside but in the shorter term, we think that the overextension of the market is going to lead it to correct and that correction is going to shake off all the people that entered once the market broke.
And we believe that it’s going to be a second chance to enter the market in favorable prices. Now, if you want to see some more of our technical analysis, head onto alphaoverbeta.net. We have a blog that posts weekly on technical analysis and the report is there. So, you can see the stats and numbers and analysis report in alphaoverbeta.net in the blog section of the technical analysis.
What did we close and open this week?
Let’s discuss positions that we have opened in previous podcasts and we recommended those companies to go long. So, we opened long on USB, US Bank Corp and that certainly paid off. USB is up 4.2% since our recommendation. Bank of America, ticker symbol BAC is up 9.3%, also another high performer. Very nice performance for BAC. And the final ticker symbol that I’m interested in mentioning is SYF which we opened I think about 10 days ago and it’s up almost 5%. So, our recommendations have paid off.
If you’d like to see more recommendations, again, head onto alphaoverbeta.net and check out our trade recommendations. They are there for you to review.
Let’s discuss our sector distribution for a minute. I would like to tell you where our portfolio stands as far as sector distribution. In sector distribution, we are extremely overweight financials. We believe that the financials are going to be heavily influenced by the fundamentals as we spoke at the beginning of this podcast. So, we are heavily invested in financials and as you can see, it really did pay because the investments that we made in Bank of America and US Bank Corp and SYF have really paid off in the last 10, 15 days.
Also, we are somewhat overweight in industrials and in real estate and technology. We are about 8% exposure to industrials, real estate, and technology. We believe that technology that although it had a major run, especially since the beginning of 2019. We think that it still has some room to go. You have to cherry-pick your stocks but we would like to see some more run to the upside as far as technology goes, especially the information sector.
In the real estate sector, we’re always invested in real estate. We maintain a 5-10 percent exposure to the real estate sector so we are at about 8% exposure to the real estate sector right now and industrials are the same. Also, one more sector that we’re increasing our position in is the consumer cyclicals. Consumer cyclicals are something that we think is going to be extremely positive especially in the light of the growing economy, steadily growing economy in the next 12-18 months. So, we believe that consumer cyclicals are a buy at this point.
We’re very underweight in energy. We don’t know where the price of oil is going to go. Geopolitical tensions in the Middle East and the rest of the areas that are oil affected. So, we have cut down on our exposure to the energy sector and also, we are somewhat low on the telecommunication services sector. So, this is our exposure. Oh, yes. One more thing. The basic materials is also one of our low exposure. We don’t see a lot of potential to the upside or the downside in the basic materials sector so we are low on that sector as well.
So, this is our exposure as far as sectors and we advise you to not follow that, but take that into consideration once you consider how to build your portfolio and again, if you need some more information regarding portfolio exposure or what to buy, you can use our trade recommendations at alphaoverbeta.net or you can shoot me an email, that’s alon@alphaoverbeta.net.
So, if we conclude we see that the market made a really nice bounce on Friday taking the market up to new highs. We said that we believe that the next week or two is going to be challenging as far as corrections. You should be nimble on your long open positions and close them with a stop loss as fast as you can, but hold on because we believe that after those two weeks of correction, maybe one or two weeks of correction; we really believe that the market is going to continue to the upside.
So, it’s going to be worth it to sit this one in. So, thank you for taking the time to listen to this podcast. As always, if you have any suggestions and comments, please don’t hesitate to shoot me an email and I’ll be more than happy to comment.
Thank you again and have a great trading week,
Alon