Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.
The week began with market volatility on rising Delta variant concerns, as the S&P 500 pulled back -1.6% on Monday in what was the 5th worst day of performance for the index this year. Additionally, the US 10-year Treasury yield moved sharply lower and reached an intraday low of 1.13%! However once again, the 50-day moving average acted as the technical backstop with the S&P 500 able to rebound from this level- a trend that has persisted since the positive vaccine news in November.
We are encouraged by elevated vaccination rates and low hospitalization rates here in the US, and see outsized risks more at the global level for equities. Our stance is that until a variant proves resistant to current vaccines, we think the waves of threat and corresponding market volatility (more specifically on "reopen areas") should be purchased. Fundamental trends remain strong with Q2 earnings season maintaining the trend of the past several quarters so far- that being historically elevated beat rates and earnings surprises. Credit spreads remain very narrow and low interest rates are broadly supportive of equity markets, though their volatility is expected to remain a key influence on sector and stock rotation beneath the surface.
Looking under the hood of the market, the stocks most levered to an economic reopening have been hit the hardest over the past several weeks as Delta variant concerns have risen. For example, these “reopen stocks” have sold off 14% on average since May. On the other hand, the “pandemic winners” (that had largely been taking a breather in the earlier part of the year as the reflation trade was gaining steam) have seen renewed strength of late- up 4% on average since May. We recommend a balance of these stocks within portfolios, but view the pullbacks in “reopen stocks” recently as opportunity to accumulate with new money.
Moreover, the small caps have generally been grinding sideways for the past several months, and reached short- term oversold levels in Monday’s weakness. The group was able to find support at the bottom-end of its recent range (and just above its 200 DMA), and rebound strongly- leading Tuesday’s rally on 95% advancing volume. Technically, sideways patterns following sharp upside moves (digestion periods) usually resolve themselves higher. Additionally, we note that the percentage of small cap stocks above their 50 DMA moved below 20% on Monday. This can often occur near lows historically, and typically leads to above average returns over the next 1, 3, 6, and 12 months. We remain positive on the small caps over the next 6-12 months, and would accumulate the group as they bounce from the lower end of their recent range.
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The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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