Our Tactical sector report looks at price action and options market indicators to evaluate potential near-term dislocations in price. Over the past 3-6 months, there has been a ramp in share gains for XLRE and XLU at the expense of Energy, Materials and Technology. From the longer-term (3-5yr) view in the table below we can see XLK was the standout and is now correcting in the near-term. Other longer-term leaders include XLE and XLI with the former also near-term oversold from this lens.
Our process takes these tactical indicators and filters them through a high-level analysis of macro trends. Presently the current macro environment features US equities in an uptrend, interest rates in a downtrend, commodities in a downtrend and USD moving sideways. This setup historically is a tailwind to Growth and Min vol. and a headwind to commodities exposures and cyclicals.
With that in mind, we like the opportunity presented by oversold XLK and we have boosted our model portfolio OW position in XLK over the past week. We remain skeptical of commodities linked sectors despite some improvement in the near term as long-term trend structures are negative inputs.
We will be watching the path of the US 10yr Yield and the Bloomberg Commodities Index closely to see if easing will spark a material rally that can change those negative trends. The 10yr Yield remains in a downtrend.
The Bloomberg Commodities Index has shown bullish reversal above the 97 level but is nearing resistance at the 101 level. Our process still characterizes the price action as longer-term negative.
Data sourced from FactSet Data Systems
