March 14, 2019

Heading into Q2, equity markets are likely moving into the early stages of a multi-month period of consolidation. This could be due to intermediate-term/weekly indicators, tracking 1-2 quarter shifts, moving toward overbought levels, similar to what developed in the early stages of the cycle lows in Q2 2016.

03-14-2019 SPY

 

For long-term investors, pullbacks and consolidation in Q2 should be viewed as an opportunity to build exposure to established leadership in Software, Security, Processors, and Med Tech. They should also look into more cyclical groups (Semis, Industrials, select Materials, and Financials) that are in the early stages of new up cycles after a 12-month bear market in 2018, many from secular uptrends defined by rising 200-day simple moving averages.

  • New home sales fell 6.9% in January to a 607,000 unit annual rate, contrary to the consensus of a 0.2% gain to a 622,000 unit rate.
  • The decline was within the margin of error and the previous three months were revised up by a total of 63,000 units.
  • Sales peaked in late 2017 and grounded lower through October 2018.
  • Lower mortgage rates in the past several months boosted demand, leading to a better short-term sales trend.
  • The new home inventory fell 1.5% for the month to 336,000 units, but was up 13.9% y/y.
  • As a result, the months’ available supply picked up to 6.6 from 6.3, notably higher than the 3.9-month supply of existing single-family homes.
  • This shows that demand is weaker for new homes than for existing homes, mostly due to higher prices and lower affordability of new homes.
  • New home prices are correcting with both the mean and median falling on a y/y trend basis, which should improve affordability this year.

Initial claims for unemployment insurance rose 6,000 last week to 229,000, above the consensus of a 1,000 increase to 224,000. Although, the four-week average of claims fell 2,500 to 223,750. While this level is above the cycle trough reached last September, it is still very low by historical standards, as labor market conditions remain tight.

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