Flight to safety or sector rotation?

Cyclical and defensive sectors nicely diverged in yesterday’s trading.

Source: Industry Performance Chart 2018/09/06

The same pattern can be seen when looking at the performance since August 29th:

Source: Industry Performance Chart 08/29-09/06

So far this looks like to me as a healthy correction in an uptrend. Stretched/leading sectors were sold more heavily, while money went into the laggards.

 

Disclosure: We have no positions in XLRE,XLY,XLK,XLI,XLB,XLE,XLP,XLV,XLU,XLF.

Positive EPS Guidance To Drive Markets?

A potential positive catalyst for the year ahead:

From December 31 through February 15, 127 S&P 500 companies have issued positive EPS guidance for 2018. This number is more than double the 10-year average of 49 for this same period. In fact, this number marked the highest number of S&P 500 companies issuing positive EPS guidance for a year (through this point in time) since FactSet began tracking guidance data in 2007.
The sector breakdown of EPS guidance is very pro-cyclical:
What are the drivers of this optimism:
What is driving the increase in the positive EPS guidance for 2018? The decrease in the corporate tax rate for 2018 due to the new tax law is clearly a significant factor. Other factors contributing to the increase in positive EPS guidance likely include an improving global economy and a weaker U.S. dollar.
A similar picture emerges as one looks at the performance of each sector year-to-date:
Could it be the major force behind the performance of the S&P 500 this year?
Disclosure: We don’t have any positions in the above ETFs.

Europe REITs Consolidating

After finishing 2017 with a breakout run from a 4-month-long consolidation channel to new multi-year highs, the iShares European Property Yield ETF (IPRP) is digesting the new highs in a possible head and shoulders pattern:

Source: Bloomberg

If price breaks below the green line (so-called neckline of the pattern), then we might see a drop to the 39 handle, as the measurement rule uses the distance from the neckline to the high of the head as the sum to be subtracted from the neckline. This target area falls right to an up-sloping trendline acting as support for now.

Remember that a head-and-shoulders pattern is validated only by the price crossing the neckline decisively.

 

Disclosure: We don’t have any positions in IPRP.

 

Not A Great Start Of The Year…

at least for the Real Estate sector…

The below chart shows the equal weight sector ETF performance YTD, representing what the average stock gained/lost in 2018 so far. Real Estate stocks lost 3% on average, being the second worst performers.

Source: Stockcharts.com

The same can be said about the market cap weighted sector ETFs, Cyclical sectors are outperforming while the Defensives are lagging the market:

Source: Stockcharts.com

Disclosure: We have no positions in the above ETFs.

Retail Default Levels Above Recession Levels in 2017

This chart from Moody’s is showing that one in five retail and apparel issuers was in default at the end of 2017:

Source: Record Number Of Retail Closures In 2017

However, this is only a reflection of the past, the worst may be behind us:

“we think 2018 is looking brighter across numerous sectors, with even department stores — one of the worst performers in 2018 — considerably paring losses.”

Source: Record Number Of Retail Closures In 2017

This is a chart of a retail ETF that tells the whole story. Now it is at a make-or-break point after a 2 and a half year decline:

Source: Bloomberg