Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The S&P 500 experienced a -7% pullback in three days, which has been relatively commonplace in this recovery process- having happened 5 times since the March lows. In these previous instances, the pullback was sharp and swift, as the S&P 500 was able to recover fairly quickly. Eventually that will not be the case as equities become too stretched to the upside and will need more time to consolidate. But odds are the current pullback is a buying opportunity, especially when the longer term trend is considered.
We view the current pullback as a normal digestion of the market's recent strong gains, particularly in some of the more tech-oriented areas that were in need of a “breather.” We have been noting investor complacency for a while now, as reflected in very low put/call ratios. The current pullback was able to relieve some of that complacency, and the equity put/call ratio is now in line with its average of the past 12 months. The 7% selloff in 3 days also did not come in conjunction with a move lower in bond yields, which would indicate a more “risk- off” approach by investors. Instead, bond yields are actually slightly above levels from the recent September 2nd equity market peak. Additionally, some of the most beaten-up equity market areas- i.e. the hotels, restaurants, and leisure industry group- were actually able to move higher over the past week (to the highest level of this recovery). These data points support our view that the market pullback is a normal consolidation period.
The S&P 500 was able to hold its 50 DMA and bounce so far. We will be looking for follow-through in the coming days. The average stock has also been able to hold its 50 DMA, down just under 5% in the pullback and within a continuation of its sideways grind that has been in place for the better part of three months. With equities just above support levels and the most short-term oversold they have been since March (along with our positive long term view), we would be looking to accumulate favored sectors and stocks. In general, we would stick with what is working in this environment. Our favored sectors remain Technology, Communication Services, Health Care, and Consumer Discretionary. But we also would be looking to accumulate Industrials and Materials for those of you who have been underweight those areas.
Moreover, we do not believe this is the time to make major shifts to Value or Small Cap. Those areas can remain below benchmark weightings until technical momentum improves. Fundamental strength has been the driving force for Growth vs Value and Large vs Small over the past year or so. This trend of better relative earnings growth for Growth vs Value and Large vs Small remains in place, and as such we would stick with Large Cap Growth for now.
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