Stellar Year For Stocks Now Suggests Strong Follow-Through In 2020

2.  At the bottom of the rankings, we find the two most highly cyclical sectors: Basic Materials and Energy, primarily because these sectors continue to see significant net reductions to their earnings estimates from the sell-side analyst community – but that might change if a Phase 1 trade deal is signed.

3.  Looking at the Bull scores, Technology and Energy share the top score of 60, followed by Industrial at 55, as stocks within these sectors have displayed relative strength on strong market days. Defensive sector Utilities scores the lowest at 32. The top-bottom spread is a healthy 28 points, which reflects low sector correlations on strong market days. It is desirable in a healthy market to see low correlations reflected in a top-bottom spread of at least 20 points, which indicates that investors have clear preferences in the market segments and stocks they want to hold (rather than broad risk-on behavior).

4.  Looking at the Bear scores, as usual, we find defensive sector Utilities alone in the top spot with a score of 66, followed by Consumer Goods at 58, which means that stocks within these sectors have been the preferred safe havens lately on weak market days. Energy, Materials, and Technology share the lowest score of 43, followed closely by Industrial at 44, as investors have fled during recent market weakness. The top-bottom spread is 23 points, which reflects low sector correlations on weak market days. Ideally, certain sectors will hold up relatively well while others are selling off (rather than broad risk-off behavior), so it is desirable in a healthy market to see low correlations reflected in a top-bottom spread of at least 20 points.

5.  Healthcare displays the best all-around combination of Outlook/Bull/Bear scores, followed by Financial, while Energy is the worst. Looking at just the Bull/Bear combination, Healthcare is the best, indicating superior relative performance (on average) in extreme market conditions (whether bullish or bearish), while Materials is the worst.

6.  I would say this week’s fundamentals-based Outlook rankings now reflect a bullish bias, given that the top six names are all economically-sensitive or all-weather, and Consumer Services and Industrial have leapfrogged Consumer Goods and Utilities. If Energy and Materials can get some analyst upgrades (such as in the aftermath of a trade deal), the rankings might start to look extremely bullish. It seems to me that the sell-side analyst community is still grappling with visibility in capital spending programs and earnings growth, but investors have already called a bottom and aren’t waiting around for those upward revisions. Keep in mind, the Outlook Rank does not include timing, momentum, or relative strength factors, but rather reflects the consensus fundamental expectations at a given point in time for individual stocks, aggregated by sector.

ETF Trading Ideas:

Our Sector Rotation model, which appropriately weights Outlook, Bull, and Bear scores in accordance with the overall market’s prevailing trend (bullish, neutral, or defensive), retains a bullish bias and suggests holding Financial (IYF), Healthcare (IYH), and Technology (IYW), in that order. (Note: In this model, we consider the bias to be bullish from a rules-based trend-following standpoint when SPY is above both its 50-day and 200-day simple moving averages.)

Besides iShares’ IYF, IYH, and IYW, other highly-ranked ETFs in our SectorCast model (which scores nearly 800 US-listed equity ETFs) from the Financial, Healthcare, and Technology sectors include SPDR S&P Capital Markets (KCE), First Trust NASDAQ Pharmaceuticals (FTXH), and First Trust NASDAQ 100 Technology Sector (QTEC).

If you prefer a neutral bias, the Sector Rotation model suggests holding Financial, Healthcare, and Telecom, in that order. On the other hand, if you are more comfortable with a defensive stance on the market, the model suggests holding Utilities, Telecom, and Healthcare, in that order.

An assortment of other interesting ETFs that are scoring well in our latest rankings include Invesco Dynamic Pharmaceuticals (PJP), Arrow QVM Equity Factor (QVM), First Trust Dorsey Wright Momentum & Value (DVLU), Aptus Fortified Value (FTVA), Invesco S&P SmallCap Value with Momentum (XSVM), SPDR S&P Retail (XRT), Davis Select Financial (DFNL), Invesco Financial Preferred (PGF), SPDR S&P Bank (KBE), Invesco Buyback Achievers (PKW), iShares Evolved US Innovative Healthcare (IEIH), First Trust Financials AlphaDEX (FXO), Cambria Shareholder Yield (SYLD), Pacer US Small Cap Cash Cows 100 (CALF), Invesco Dynamic Biotech & Genome (PBE), VanEck Vectors Morningstar Wide Moat (MOAT), and Direxion All Cap Insider Sentiment (KNOW, which tracks a Sabrient index).

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Disclaimer: Sabrient's newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into ...

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