Caution urged over contrarian signal

Although sentiment indicators are at a pessimistic extreme and suggestive of a contrarian buy signal, Ari Wald, Technical Analyst at Oppenheimer, urges caution.

Wald points out the S&P 500’s four-year uptrend has been breached (Chart 1) and seasonal trends typically remain bearish until October 9 (Chart 2). Moreover, he believes the S&P will be limited by resistance at 2040, because Energy stocks (which comprise 7% of the index by market cap) are likely to remain a headwind over the coming months due to their bearish long-term trend (see Chart 3).

Wald therefore recommends selling laggard sectors such as Energy and Materials and using weakness in the coming weeks to buy stocks that 1) are coming off a new high in Q3 2015, 2) held Q1 2015 support during the correction, and 3) exhibit a bullish relative trend. Specifically, he recommends buying internet growth stocks such as Amazon and Google.

See Chart 1, Chart 2 and Chart 3.