January To Be A Month Of Sector-Level Mean Reversion

Brean Capital’s Frank Longman expects January 2017 to see sector-level mean reversions, with recent laggards (healthcare, discretionary) holding their own against leaders (financials and industrials).

Meanwhile, Longman sets 2.65 as a key level for U.S. 10-year rate and put forth various scenarios in his note:

• “If rates consolidate and low vol bounces, breadth could easily remain ‘OK’ enough for broad market dips to remain rather shallow although we'd likely see significant mean reversion in financials.”
• “If rates break out above 2.65, low vol's impact on marginal breadth is likely to be a larger negative that feeds a January correction. A rate breakout would also threaten the expected mean reversion bounce in healthcare.”
• “If rates pull back, we can use the pullback to be a net seller of healthcare, staples, utilities and REITs while adding exposure to financials, industrials, materials and energy.”
• Though technology and discretionary sectors are the wildcards, Longman is Underweight on both. In fact, he may become constructive in technology “more easily” versus discretionary which has major issues with relative strength.

On the S&P 500, Longman said the broader index is trying to hold to its 10 DMA and sees about 2208–2222 as a “normal healthy correction.”

“Similar setups have, in the past tended to give one test of the 50 dma (2186 and rising) with a close below that straining the bullish construct more meaningfully,” Longman wrote in a note.