Weekly Preview / May 9
Notable Events on our Weekly Watchlist:
Monday Earnings: AMC, CARG, DUK, CTXS, TSN, SRG, SPG, NIO, MCHP, NVAX, VWTR
Tuesday Earnings: EA, HRB, OXY, CELH, TTD, PTON
Wednesday Earnings: BABA, BYND, GOOS, WEN, DIS, FVRR, SONO,
Inflation and core inflation rate YoY
Thursday Earnings: IRIX, SIX, TPR, MOGO,
Producer Price Index
Friday None
ETFs to watch this week: XBI, XLRE, XLY, XLE, XLB
After a crucial week in terms of central bank comments, we are headed towards a couple of days of earnings from biotech companies, meme-stock favorites, real estate, energy and basic materials. On the economic calendar front, we've got the all important inflation number on Wednesday, as well as the PPI release on Thursday. We expect more volatility, and are closely watching dollar transaction volume from any kind of respite that would signal a tradeable short-term bottom. With investor sentiment very low, our algorithms are starting to see the US Dollar as very overbought. With extreme downside deviations in many stock indices, a short term rally would not be surprising. That rally should be used however, to lighten up on exposure, in case you find yourself too exposed to risk at this point.
Volume Analysis
Dollar transaction volume is still sitting at average levels, but what is definitely not average is volatility in SPY. We might see tentative signs that volume is topping here, but this is a measure to be watched daily in order to confirm either a continuation or reversal. Right now, we'll need to wait and see.
Volatility still showing no sign of abating in SPY.
Multi Asset Class Portfolio Analysis
An equal weight portfolio comprised of stocks, bonds, commodities and gold just had one of the largest drawdowns on record in the past 2 years. In other words, it is highly unusual for cash to perform so well versus all major asset classes. This is one of the reasons our system has identified a good opportunity to start deploying cash (and even be short the US Dollar).
Sectors Relative and Absolute Z-Score Analysis
On the sectors front, we recommend keeping an eye on relative out-performers. These sectors should continue to do well in the medium term. While this setup seems ripe for a rotation, it could only be the case in the very short term given the fundamental macro environment we find ourselves in (rising rates). In other words, the most oversold sectors could have a couple of rip-your-face-off rallies, but these opportunities should be used to lighten up on allocations. Instead, outperforming sectors should be bought.
Takeaway:
As outlined in the Sigma Report put out over the weekend, it is time to move out of cash. However, this move should have a defensive nature and would rather reflect the overbought and highly extended condition of the US Dollar, which is unsustainable near term. It is this weakness we are banking on using Gold and Commodities in our algo strategies. In a stock portfolio, such positioning could be reflected by taking long positions in Real Estate, Basic Materials and Healthcare (where the most attractive technical setups are available - see charts below).
Andrei Sota
XLRE Chart (Real Estate)
XLB Chart (Basic Materials)
XLV Chart (Healthcare)