Basic Materials/Industrials
This segment has been out of favor until recently, and I see its October advance as likely to be short-lived. There are many value traps here. I see limited upside, although downside could be contained by the emergence of more activists and a steady-but-slow advance in manufacturing activity.
This segment has been out of favor until recently, and I see its October advance as likely to be short-lived. There are many value traps here. I see limited upside, although downside could be contained by the emergence of more activists and a steady-but-slow advance in manufacturing activity.
My overall sentiment: Neutral
Consumer DurablesAutos and housing will be disintermediated and will likely peak under the influence of rising interest rates. Like student loans, prime and subprime auto loans are also "bubble-like" and could be reined in by lenders should defaults trend higher. .
My overall sentiment: Negative
Consumer StaplesThis group is already facing a deteriorating business landscape and competitive headwinds from generic products. A stronger U.S. dollar poses additional risk, as does competition from higher interest rates, because stocks in the sector trade to some degree based on dividend yields. Those yields lose their influence when interest rates rise, and there's uncertainty as to how big a rate climb we'll see.
My overall sentiment: Negative
EnergyThis is sector facing a geopolitical battleground. Energy prices seem unlikely to rise appreciably in a global economic slowdown, but stocks have ripped higher over the last five weeks and are now vulnerable to the downside.
My overall sentiment: Negative
Financial ServicesBanks are one of the market's few truly rate-sensitive sectors. With balance sheets that have a structural imbalance between rate-sensitive assets and rate-sensitive liabilities, the sector stands to be benefit from higher interest rates.
However, the sector has already climbed rapidly in price, and investors have meaningfully discounted the baseline expectation of a gradual interest-rate rise over 2016-17. Investors haven't priced in the possibility of rates are moving significantly in the year ahead -- nor, alternatively, have they considered the chance that global economic growth will fall more than generally expected. (That would reduce credit demand and create rising loan losses.) As such, equity and debt offerings might collide with the sector's recently rising share prices.
I don't feel now is the time to buy into the financial sector but I would look to do so if we saw a healthy decline in stock prices of around 5%.
My overall sentiment: Positive
Health careThe political battleground over health care will likely intensify heading into the 2016 presidential election. Health-care stocks are depressed, but price-to-earnings ratios still seem rich and elevated to me. I can't see the case for much upside, but I can see the case ahead for more scandals like the one currently swirling around Valeant Pharmaceuticals(VRX).
My overall sentiment: Neutral
Homebuilders/Real Estate/REITsThe housing recovery has likely peaked, with the sector now threatened by higher mortgage rates and less affordability. (Home prices have advanced substantially over the last two to three years.) In the commercial space, I recommend avoiding "old-technology" mall-based REITs that Amazon (AMZN) and many other online retailers are disrupting. Also avoid homebuilders/developers, which will lose their pricing power.
My overall sentiment: Negative
Retail/Consumer Discretionary SectorThe retail industry is being disrupted -- hard -- and that will continue. There are simply too many big-box chains, and I expect a cycle of bankruptcies over the next few years. The oversupply of restaurants is not dissimilar.
A slowdown in home refinancings (a source of consumer discretionary income), stands to be a headwind for the group -- as do higher wage costs. And ironically, the success of Apple's ecosystem is draining non-smart-phone retail sales.
On the other hand, a tightening U.S. job market should result in some improvement in consumer disposable income. But at the same time, recent rises in health care, food and other costs of living will probably eat into Americans' incomes; simply put I believe the middle class is struggling.
I recommend particularly avoiding stocks of department stores and trendy, fickle specialty apparel. I have little exposure in this sector, as investors have already beaten the segment's share prices down. Vibrant smart-phone and sneaker sales are probably not a permanent "affair," and their recent growth trajectory is likely unsustainable.
My overall sentiment: Negative
TechnologyMany of the tech sector's innovative disruptors seem to me to be exploited and overpriced. Investors have also combed over "old-technology" companies, and valuations are extended there, too. I would look to buy into the tech sector on a pullback from current prices.
My overall sentiment: Neutral
Transports
This sector faces a positive in that energy-price advances should be contained from here, but a negative in that global economic growth is slowing. Recent results have already come in under consensus at companies like United Parcel Service (UPS), where revenues fell short of expectations. (UPS is a recent short of mine.) On the other hand, railways will likely get a boost from reports that Canadian Pacific (CP) might be interested in buying Norfolk Southern (NSC). More industry consolidations could lie ahead.
This sector faces a positive in that energy-price advances should be contained from here, but a negative in that global economic growth is slowing. Recent results have already come in under consensus at companies like United Parcel Service (UPS), where revenues fell short of expectations. (UPS is a recent short of mine.) On the other hand, railways will likely get a boost from reports that Canadian Pacific (CP) might be interested in buying Norfolk Southern (NSC). More industry consolidations could lie ahead.
My overall sentiment: Neutral
UtilitiesStated simply, this sector's dividend yields can't compete with higher interest rates. The 10-year Treasury yield hit 2.35% yesterday, its highest level since mid-July.
My overall sentiment: Negative