Day Hagan Tech Talk: Shoreline Equities and Smart Sector Update
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Summary
The domestic equity market has sloshed back and forth over the past few months, confined to a multi-month trading range. Nonetheless, some Advance-Decline lines have reached new highs and new 52-Week Highs are slowly expanding, supporting equities from a primary-trend perspective.
Like a Shoreline
I enjoy strolling the coastline of Tampa Bay, watching as the waves “breathe” in and out. Like the waves, the domestic equity market has, over the last few months, splashed to and fro within a multi-month trading range, a short-term correction defined by both price and time. Simultaneously, however, select domestic and global Advance-Decline Lines have reached new highs. New 52-Week Highs, while not near levels from a few months ago, are slowly swelling. From a primary trend perspective, this expansion supports equities because it shows that more stocks are participating.
Smart Sector Strategies
U.S. Equity Strategy
The Catastrophic Stop Loss model, one of the main risk management components of the Smart Sector strategy, combines objective technical, sentiment, fundamental, and economic indicators to identify high-risk periods for the equity market. The model is currently supportive of the S&P 500’s primary uptrend. The Internal Composite (price-related) is bullish while the External Composite (economic, sentiment, fundamental) is neutral. If our models and indicators shift bearish, we will raise cash.
Figure 1: S&P 500 with Rising 21-day MA (short-term chart). | Short-term overbought (close to 2 standard deviations above 50-day MA) and near resistance (see below). Ideally, this equates to another consolidation period. This would help discern the next short-term directional move—new highs or a retest of underlying support (green lines below). Until then, the oft-referenced “hesitation” continues.
The Sector Allocation Model is another risk management component of the Smart Sector strategy. Entering May, Financials, Industrials, Consumer Staples, and Utilities are above benchmark weight. Energy, Real Estate, and Information Technology are neutral. Materials, Consumer Discretionary, Health Care, and Communication Services are below benchmark weight.
As Don Hagan wrote on Monday, May 7, Utilities and Financials “are supported by the two strongest model readings among the 11 S&P 500 sectors.” Sentimentrader observes, "Over the last three weeks, the Dow Jones Utility Index outperformed the S&P 500 by one of the most significant amounts in over 90 years. Similar precedents suggest the positive momentum in the traditionally defensive index persists over the ensuing month, potentially yielding superior returns compared to the S&P 500.”
Figure 2: Dow Jones Utility Average with Stochastic Indicator. | A longer-term price objective, based on the depth of the completed base, points higher (reach out for specifics). The short-term condition is overbought (OB) and close to resistance (red lines). A pause/pullback would be helpful.
In terms of Consumer Staples (above benchmark weight) and Technology, Figure 3 presents a unique, perhaps value-added, perspective.
Figure 3: Chocolate Chips (HSY) relative to Chips (semiconductor ETF). | This relative strength trend hasn’t yet made, but is close to making, a bearish-to-bullish turn. A decisive close above the red resistance line would confirm the move. Please reach out for an updated chart.
If you would like to discuss this strategy with a portfolio manager, please reach out.
International Markets (ex U.S.) Strategy
Entering May, the non-U.S. equity Core model overweighted China, France, and Germany. Japan, the U.K., Canada, Switzerland, and Australia were below benchmark weighting. The Explore model favored Israel, Mexico, Malaysia, Netherlands, and Sweden.
Figure 4: Global Advance-Decline Line & U.S. vs. All Country World Index ex U.S.| Selective overseas exposure and a strategy that incorporates a plan to manage risk seems appropriate.
If you would like to discuss this strategy with a portfolio manager, please reach out.
Fixed Income Strategy
For May, the strategy’s positioning is overweight Long-term Treasurys, U.S. High Yield, and International Investment Grade. U.S. Investment-Grade Corporates are neutral. Floating Rate Notes, Emerging Market Bonds, TIPS, and Mortgage-Backed Securities are underweight relative to the benchmark.
Figure 5: 20+ Year Treasury Bond proxy and 10-Year U.S. Treasury Yield Index. | “PRICE” has rallied up to resistance (top frame, red lines). “YIELD” has pulled back to, and around, support (lower frame, green line, blue dashed line). Considering tomorrow’s CPI and Retail Sales report and today’s PPI report, some type of reversal (higher yields, lower price) shouldn’t be surprising. Regardless, I continue to believe that the near-term direction of interest rates will play a role in the near-term direction of domestic equities.
Figure 6: International & High Yield Bond vs. U.S. Aggregate Bond. | Respect support (green lines).
If you would like to discuss this strategy with a portfolio manager, please reach out.
Final Observation
Figure 7: Gasoline – Continuous contract. | I’ll look past the inflation, stagflation, or whatever economic narrative Wall Street is espousing. The chart shows Gasoline declined from just over $2.80 (the top end of a multi-quarter trading range—red and green lines) to critical support in and around $2.50 (top horizontal blue line). A decisive move lower may cause the consumer (and maybe the Fed) to smile, while Wall Street may have to rethink their feelings about energy stocks.
Note: Energy has been rated neutral over the past few months; a good relative call.
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. Disclosures and Fact Sheet information can be found here: https://dhfunds.com/literature.
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 5.13.2024. Chart source: Stockcharts.com unless otherwise noted.
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