This Week's Message: General Conditions Don't 'Yet' Justify The Recent Rotation To Defensives

The following is my summary of our weekly market analysis:

Last week showed some very short-term technical improvement – my subjective view in “daily chart character” -- virtually across the board. The binary (objective) technical analyses showed improvement in transportation stocks (recaptured their 200-day moving average), in home builders (recaptured their 50-day moving average) and in the positioning of the 50, 100 and 200-day moving averages for healthcare.

The S&P 500 Index itself continues to exhibit strong technical trends. The message being: probabilities suggest that the bull market has significant room to run, once it completes what, at this point, appears to be healthy consolidation.

EFA (foreign developed markets ETF) showed some improvement in “daily chart character” as it rallied above 2017 support. The Asia Pacific region offered up a weaker look, as VPL (Vanguard’s Asia Pac ETF) saw its 50-day moving average cross below its 200, as well as my volume analysis flashing a near-term negative (distribution) signal. 

Emerging markets sport a mixed short-term picture, with my volume analysis showing improvement (accumulation) in DEM (dividend-oriented emerging markets ETF) and deterioration (distribution) in VWO (Vanguard’s emerging market index ETF). VWO’s large exposure to China explains its presently weaker look.

As for bonds and gold: TLT (long-term treasury ETF) recaptured its 200-day moving average, while gold is holding just above its 2018 low -- with GLD (gold ETF) showing better late-week volume action.

As for general conditions, our macro index rose 7 points to a historically solid 54.76, with the economic subindex up 4 points, financial stress unchanged and the financial markets subindex up 8.7 points.

On the negative side: Near-term sector results (as well as the improvement in bonds mentioned above) are inconsistent with the otherwise bullish macro backdrop:

1-month returns:

Utilities +9.1% (now breakeven on the year)

REITS +4.2% (now up 1% on the year)

Staples +4.0% (still down 8% on the year)

Financials -4.9% (now down 4.4% on the year)

Industrials -5.3% (now down 4.6% on the year)

Materials -3.6% (now down 3.4% on the year)

Tech -1.0% (still up 11% on the year)

Back on the positive side: Our recent increase in our telecom target (been gradually bumping it up within portfolios) has been paying off... +3.3% over the past month...

In summary: I don't see the recent rotation to defensive sectors by itself as huge cause for concern, given the presently bullish macro backdrop and the strong longer-term technical setup for the broader market -- clearly, it reflects trade fears (which of course means it could persist awhile). That said, it could morph into a legitimate rotation if indeed a protracted trade war ensues*, as that scenario would present a major/damaging headwind for the macro backdrop; in which case – at the point where probabilities favor a contraction ahead -- we'd be following suit...

*Given the political risk, a protracted trade war remains a low-probability event. That said, it appears as though the Administration believes that, at the moment, it plays well for the mid-term election.