Friday, January 29, 2016

Looking For Leadership

Are we in the midst of what will ultimately become a bear market?  That's a question everyone is asking.  A classic symptom of bear markets are that they systematically take out leadership stocks and sectors one-by-one as each counter-rally within the downtrend gets sold off taking more and more names with it each time.

Typically what you'll see during normal pullbacks within sustained uptrends is money rotate into popular, stable names while portfolio managers look to sell the laggards sitting on their books.  This allows for certain pockets to hold up stronger than the general market.  However, what we're starting to see now are some cracks in 2015's "safe haven" stocks and sectors and this could ultimately be what seals the fate of bulls and locks in bear market conditions.

We ran a list of the 9 major S&P sectors and their price performance last year (2015) vs. the start of this year (2016)

Some observations
  • The biggest winners last year were consumer discretionary and healthcare.  
  • So far this year, leadership in healthcare has rolled over with the biotech sector taking the brunt of selling.  Another leader bites the dust. 
  • The leaders so far this year have been utilities and staples (defensive) and their the only two sectors above their 50 and 200-day moving average which says something about the current environment.  Utilities is the only sector that's positive for the year.
  • Financials are the second worst performers this year.  So much for higher rates being positive for this sector.  
  • Energy may have already been capitulated as it was the worst performer last year with a loss of almost 24% while 2016 performance is in the middle of the pack.  We'll see about this.   

Bear or no-bear we believe that a full capitulation needs to happen in which no sector or area is spared for some amount of time.  That means seeing staples, utilities and the remaining individual stock strength will be sold en masse.  That's the way a true bottom is formed.

Regardless of the path, capital preservation feels extra paramount right now.  In this environment, the goal isn't to get rich but rather simply survive.  There will be huge rallies for sure but they will eventually fail until a full capitulation happens.  That happens once all areas of leadership have finally been sold.

On that note, here are some areas of potential support if we break last weeks lows.
  • 1730 which is lows of Feb 2014 and the 38.2% retracement from 2011's low.
  • 1576 which is the prior breakout point from 2007 and coincides with 38.2% retracement from whole move off the 2009 lows. 

Ryan Worch is the Managing Director of Worch Capital LLC. Worch Capital LLC is the general partner of a long/short equity strategy that operates with a directional bias and while emphasizing capital preservation at all times.

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