Day Hagan Tech Talk: Overhanging Selling Pressure and Smart Sector Update
A downloadable PDF copy of the Article: Day Hagan Tech Talk: Overhanging Selling Pressure & Smart Sector Strategy Update (pdf)
Summary
The stocks holding up the major domestic equity market indexes (Magnificent 7, Elite 8, Big 9) have yet to break down below their late September-early October lows. But away from this complex, plenty of selling has been occurring underneath the surface. I recommend following the NYSE Fang Plus Index (Figure 1) as a guidepost.
Smart Sector Strategies
U.S. Equity Strategy
The NDR Catastrophic Stop Loss model, one of the main risk management components of the Smart Sector strategy, combines time-tested, objective indicators (technical, sentiment, fundamental, and economic) designed to identify high-risk periods for the equity market. Currently, the model continues to recommend a fully invested position versus its benchmark, the S&P 500. Within that context, our models and indicators are correctly responding to the market's recent bout of weakness. However, at this point, they do not yet show a preponderance of catastrophic risks taking hold. Should they do so, we will immediately increase our cash position.
Figure 1: NYSE Fang Plus Index with Stochastics. This index recently reversed from an overbought condition as the price neared a down-sloping resistance line. This has often identified higher risk periods, with major domestic equity markets often experiencing a whoosh lower. A violation of support between 7177 and 7163 would be concerning.
Figure 2: S&P 500 with supportive momentum (MACD-top frame), falling 50-day MA (resistance-red) and rising 200-day MA (support-blue). As overhanging selling pressure comes into play (between 4400+/- and 4445 +/-), pullbacks and/or consolidation periods accompanied by improving breadth would be bullish. Regardless, the SPX needs to break the pattern of lower price peaks and lower price troughs and rebuild a new underlying base of support. This is a work in progress supported by a favorable seasonal period.
Please reach out / send an email for a seasonal chart.
The NDR Sector Allocation Model is another risk management component of the Smart Sector strategy. In reviewing the model update for October, one of the more interesting recommendations, at least to me technically, was the recent overweight recommendation of the Utility sector. To this point, NDR recently penned the following:
Utilities are on track for their worst year since 2008 and their second-worst year relative to the S&P 500 on record. Rising interest rates have made the sector’s dividend yield less competitive, leading to soaring interest expenses and contributing to a deterioration of leverage ratios. If bond yields continue to advance faster than Utilities’ dividend yield, more weakness from the sector can be expected.
However, signs of extreme pessimism have started to mount, including mean reversion, valuation, and sector fund flow indicators. The sector is the most oversold versus the S&P 500 on a six- and 12-month basis. Additionally, Utilities’ weight in the S&P 500 is near a record low at 2.4%, compared to its long-term average of 4.2%. Sentiment may be nearing a tipping point, but we would like to see reversals from the extremes…
Figure 3: Dow Jones Utility Average (log chart, weekly) – long-term view. Is the sector weighting so controversial after all, given the long-term uptrend line and oversold condition?
Please reach out for absolute and/or relative charts of the other two overweight sectors – Communication Services and Health Care.
International Markets (ex U.S.) Strategy
The “Core” aspects of the strategy underweighted several countries, including France and Germany. At the same time, the “Explore” aspect of the strategy overweighted among a few countries, including India – Figure 4. In viewing each absolute and relative price trend, they agree with the model allocations – underweight France and Germany, overweight India. If you have positions in France or Germany, please reach out for respective charts.
Figure 4: iShares MSCI India (INDA) with 50-day MA and 200 MA. A close below $43, the lower horizontal green support line (top frame), would damage the bullish absolute price chart configuration.
If you have any questions or would like to discuss this strategy in more detail with a portfolio manager, please reach out.
Fixed Income Strategy
Why do I feel the time is right for a strategy that will help navigate the current interest rate cycle?
To answer that question, I have paraphrased a report by NDR titled “Who will buy U.S. Treasurys?”
The 2023 federal deficit. The fiscal deficit for 2023 is estimated to be $1.69 trillion, above the CBO’s earlier projection of $1.539 trillion and 6.3% of GDP. Future deficits are projected to remain large, even without a recession – about 6% to 7% of GDP.
Who will buy the debt? If we don’t reduce the deficit, the question remains: who will buy all that debt? Since the pandemic, the biggest buyers have been the Fed, the banks, and state and local governments.
All three are cutting back on their buying or reducing their holdings. The Federal Reserve has been a net seller for the past six quarters through Q3. The banks have reduced their holdings in the past four quarters through Q2 and are underwater around 10% on their Treasury holdings compared with a year ago. State and local governments are still buying, but not as much as they had been. (The GSE’s have been net sellers.) Pension funds, as do insurance companies, continue to buy, but they can only do so much. Foreign investors continued to buy through Q2 but stopped in July for only the second time since the Fed began raising rates in March 2022.
Households and ETFs have been shouldering the burden and will be asked to do more in the future. Will they require a higher yield to incentivize them to buy? So far, the answer has been yes. Barring a recession, that’s not an encouraging development for holders of Treasurys and all other debt.
Please let me know if you would like to schedule a call to go over the process and discipline underpinning our Smart Sector with Catastrophic Stop, Smart Sector International, and/or Smart Sector Fixed Income strategies.
Day Hagan Asset Management appreciates being part of your business, either through our research efforts or investment strategies. Please let us know how we can further support you.
Art Huprich, CMT®
Chief Market Technician
Day Hagan Asset Management
—Written 10.15 & 16.2023. Chart source: Stockcharts.com unless otherwise noted.
Future Online Events
Disclosure: The data and analysis contained herein are provided “as is” and without warranty of any kind, either express or implied. Day Hagan Asset Management (DHAM), any of its affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any Day Hagan Asset Management literature or marketing materials. All opinions expressed herein are subject to change without notice, and you should always obtain current information and perform due diligence before investing. DHAM accounts that DHAM or its affiliated companies manage, or their respective shareholders, directors, officers and/or employees, may have long or short positions in the securities discussed herein and may purchase or sell such securities without notice. The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and income they produce may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors.
Investment advisory services offered through Donald L. Hagan, LLC, a SEC registered investment advisory firm. Accounts held at Raymond James and Associates, Inc. (member NYSE, SIPC) and Charles Schwab & Co., Inc. (member FINRA, SIPC). Day Hagan Asset Management is a dba of Donald L. Hagan, LLC.