Investors tilted towards cyclical sector have likely been pleased with their portfolio's performance over the past month. Healthy economic readings along with the general belief that trade tensions will slowly continue to ease has many adding risk to their portfolios.
As I mentioned last week, I expect current sentiment to continue through the end of 2019 pushing the S&P 500 towards the 3200 level before beginning to pull back in the 1st quarter of 2020.
With that in mind, cyclical trades are going to be my focus for the week ahead.
iShares PHLX Semiconductor ETF (SOXX)
When a sector rises more than 50% in less than a year, I tend to favor taking some chips off the table and locking in some gains. With semiconductors, however, I just don't see any reason to.
Recent earnings reports from top sector components, including Intel, Qualcomm, Applied Materials, AMD and NVidia all delivered healthy results and, in many cases, improved guidance for 2020. The trade war was supposed to hit semis especially hard and, while there have been speed bumps along the way, the sector is still going strong.
With trade tensions heading more in the direction of easing instead of worsening, I expect the economic backdrop for this group to continue improving. Some trade resolution is already priced into this group but I think there's still more upside ahead.
Consumer Discretionary Select Sector SPDR ETF (XLY)
The discretionary sector has been one of the wonkier groups of the past six months. Everything has been teed up for a rally but it's been nearly dead money since May.
Last Friday's retail report could be signaling some of the problem. Segments, such as groceries and home goods, showed healthy gains but the more cyclical areas of retail, such as electronics and home furnishings, were weak. We've heard a lot about the strength of the consumer over the past few quarters but this could be an indication that not all is well below the surface.
The wedge pattern here suggests a move one way or the other is coming and I believe it's going to be to the downside. Overall sentiment is negative and I'd stay away from adding to positions here.
iShares Nasdaq Biotechnology ETF (IBB)
Here's a beautiful chart! Biotechs are up more than 16% since hitting their early-October low on the heels of several positive developments.
Biogen has a potential big time drug on its hands with its Alzheimer's drug that looks positive in its early testing stages. Similarly, Vertex Pharmaceuticals just received approval for its cystic fibrosis drug. Also take into account the President's announced healthcare transparency order that doesn't look like it has the teeth that many expected and you've got multiple positive catalysts for the sector.
In the short-term, I'm looking for IBB to make a run at earlier year highs in the $115 range, a relatively modest upside of around 3%, but the long-term picture remains brighter, especially if M&A activity begins picking up again.
ETFMG Alternative Harvest ETF (MJ)
Sentiment in the pot stock sector is about as ugly as it can get right now, but that could be a contrarian signal to start accumulating while others are staying away.
Yes, there's not much good to say about this sector right now. Earnings reports along with demand have been miserable and companies are beginning to pare back production as well. I think it's safe to say that traders significantly overestimated marijuana demand and now valuations and expectations are coming back down to earth.
The question now is where do expectations and price discovery line up. Is the sector oversold at this point or can it drop another 30%? I think both scenarios are in play but I also believe that just about every worst case scenario is priced into this sector right now. In that case, I'm still more inclined to bottom feed and pick up a few shares here than to continue avoiding altogether (disclosure: I already own a small position in MJ).
I made the case earlier about why I think this sector is a buy. This won't be a trade for the timid but I also think it has a lot of potential if you're ready to ride it out.
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