Short-term indicators are overbought for small-cap indexes, Fundstrat technical strategist Robert Sluymer said, and most cyclical indicators suggest a pullback is developing over the next two to four weeks.
At the same time, the dollar index "has established a low in the low-90s but is also overbought short-term, having rallied back to resistance near 94," Sluymer wrote. "Expect a shallow pullback."
Fundstrat, the independent research boutique, said investors should favor U.S. equities even with a pullback short-term, as the MSCI EAFE Index Fund has "rallied into heavy resistance while relative performance remains in a longer-term downtrend and is again diverging negatively from its price."
While short-term indicators suggest a retreat, the long-term cycle is intact for the S&P 500 based on momentum, price trends and total returns of stocks vs. bonds, Fundstrat said. Similarly, intermediate-term indicators "continue to build positively from moderately oversold levels following the summer consolidation/rotational correction," Sluymer wrote.
Here are the best ways to use a pending short-term pullback to snag some gains, per Fundstrat.
- Financials: "After breaking out to new cycle highs in September, short-term indicators are peaking suggesting a pending pullback across the sector. Favor larger-cap banks/brokers (Citigroup Inc. (C) , Morgan Stanley (MS) and Goldman Sachs Group Inc. (GS) ) over regionals (SPDR KBW Regional Banking ETF (KRE) , KeyCorp (KEY) , Regions Financial Corp. (RF) and Bank of the Ozarks Inc. (OZRK) )"
- Utilities: "Expect oversold short-term bounces to be short lived: Utilities SPDR ETF (XLU) , Duke Energy Corp. (DUK) and NiSource Inc. (NI) )"
- Healthcare: "Biotech revisited: Continue to accumulate Regeneron Pharmaceuticals Inc. (REGN) , Biogen Inc. (BIIB) , Gilead Sciences Inc. (GILD) and Celgene Corp. (CELG) on recent pullbacks."
- Retail: "Recent oversold counter-trend rebounds failing at downtrends: SPDR S&P Retail ETF (XRT) , Ralph Lauren Corp. (RL) , Tractor Supply Co. (TSCO) , Target Corp. (TGT) -- Favor Amazon.com Inc. (AMZN) "
- Technology: "Accelerating ideas following Summer consolidation/pullback: Alphabet Inc. (GOOGL) , Broadcom Ltd. (AVGO) , Tyler Technologies Inc. (TYL) , PTC Inc. (PTC) ."
- Airlines: "Use pending short-term pullbacks to accumulate as Delta Air Lines Inc. (DAL) and JetBlue Airways Corp. (JBLU) rally from rising 4-year ma's."
- Energy follow-up: "Short-term momentum continues to peak across the sector following the September surge. Expect shallow pullbacks over the coming 1-2 weeks with key support between 100- and 50-dma's. energy Select Sector SPDR ETF (XLE) , SPDR S&P Oil & Gas Explore & Prod. ETF (XOP) and Vaneck Vectors Oil Services ETF (OIH) ."
Citigroup, KeyCorp, Alphabet and Broadcom are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio . Want to be alerted before Cramer buys or sells C, KEY, GOOGL or AVGO? Learn more now.
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