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Sector Detector: Fed tries to refill bulls’ fuel tank as cyclicals lead
by Sabrient - May 23rd, 2013 1:52 am
Courtesy of Sabrient Systems and Gradient Analytics
The market went through some gyrations on Wednesday in reaction to Fed Chairman Bernanke’s testimony before the Joint Economic Committee. He first defended continued quant easing by warning, “A premature tightening of monetary policy could lead interest rates to rise temporarily but also would carry a substantial risk of slowing or ending the economic recovery.” Stocks dutifully rallied and all major indexes hit new intraday highs.
But alas, consensus is apparently not a given over the longer term. The minutes hinted that a tapering off could start sooner, “A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth.” So … the indexes turned tail and sold off by the close to give back the last few days’ gains. Still, the Fed is clearly prepared to keep the liquidity flowing as long as necessary, which should be giving the market sufficient confidence to continue its uptrend.
Furthermore, with Japan aggressively devaluing the yen, the ECB is likely to take more aggressive action with the euro. As Scott Minerd of Guggenheim Partners has opined in his weekly commentary, it would serve the primary purpose of propping up the EU peripheral economies while avoiding criticism from the core economies of Germany and France by helping them to boost exports.
With this global currency war approaching full participation, the major economies of the world are seeking to devalue themselves into prosperity. So far, it seems like an effective plan. In fact, Goldman Sachs (GS) revised its year-end target for the S&P 500 from 1,575 to 1,750 while anticipating increasing dividends from the S&P 500.
That will require greater leadership from the cyclicals, and indeed sector rotation (or broadening) continues. Over the past month, the new sector leaders have been Technology, Energy, Materials, Financial, and Industrial, which gives further evidence of the broadening we are seeing from new capital entering the market.
We already knew that the outperformance of defensive sectors like Healthcare, Consumer Staples and Utilities, primarily due to investor comfort with their inelasticity of product demand and dividend yields, wouldn’t be sufficient to power the markets forever, particularly as their valuations surged. No, a continuation of the rally will have to be led…
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What the Market Wants: No Easy Answer
by Sabrient - May 20th, 2013 7:39 pm
Courtesy of David Brown, Sabrient Systems and Gradient Analytics
So, what did the market want today? Nothing it appears. It traded on weak volume and had very little movement. This morning the market hated commodities especially silver, but by days end, the market liked silver, gold and even oil but not the dollar. Why?
Last week the economic reports were tough, with bad misses on more than one occasion. But the market tended to ignore the bad news, probably because money continues to pour into equities from money market funds, long term fixed income, and many struggling foreign economies. On Thursday, investors finally caved to even more bad news from Initial Jobless Claims and weak Housing Starts. Then on Friday, when Michigan Sentiment and Leading Indicators posted large positive surprises, the money came pouring back to generate quite a positive week for all the leading domestic indices with Small-cap Growth leading the way, up 2.6% for the week. The Russell 2000 hit new all-time highs closing up 2.2%, and the S&P 500 and DJI both hit new highs up about 2% each. None of that explains today.
In contrast to a successful quarter of better-than-expected corporate earnings, investors had a lot more to worry about than poor economic numbers: a plethora of revenue misses; bubbling problems related to the IRS; and the White House--Benghazi controversy that’s made more than just investors nervous.
Although today’s comments from Chicago Fed President were optimistic, they caused some traders to worry again about QE3 phasing out earlier than expected and that Bernanke might discuss it before Congress as early as this Wednesday. Frankly, there is little news this week with only Existing Home Sales tomorrow, Initial Jobless Claims and New Homes Sales on Thursday, and Durable Goods on Friday. But without question, the key to this week will be Bernanke’s remarks on Wednesday. There is a group of large retailers including Best Buy (BBY), Saks (SKS), Home Depot (HD), and several others reporting earnings before the market opens tomorrow. Obviously, their reports could impact this market that is waiting for more news.
The bottom line is there are no easy answers to “what the market wants.” Our analysis of current valuations showed a bit above average valuations with plenty of undervalued companies remaining. Compared to highs over the last three decades, current valuations are far below them.
Volume was very weak…
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ETF Periscope: Wall Street Shrugs Off Fed’s Musings Regarding Turning Off QE Tap
by Sabrient - May 20th, 2013 3:58 pm
Courtesy of Daniel Sckolnik, Sabrient Systems and Gradient Analytics
“Some of us think holding on makes us strong; but sometimes it is letting go.” -- Herman Hesse
This is one obsessed Bull that is raging through Wall Street at the moment.
Not even last Thursday’s potentially destabilizing comments by a Fed official, who essentially said that the current round of bond purchases by the central bank could begin tapering off within the next few months, did much to give investors pause.
The market’s upbeat sentiment kept rolling right along, as yet more record highs were hit throughout the week.
The Dow Jones Industrial Average (DJIA) added 1.6% for the week, while the tech-laden Nasdaq Composite Index (COMP) gained 1.8% over the course of the same time period. Meanwhile, the S&P 500 Index (SPX) added another 2.0% to its weekly bottom line, putting it up 17% year-to-date.
Rationally speaking, it could be construed as being a little odd that the threat of turning off the QE spigot, the very same one that has effectively been the chief source of fuel for the current bull market, did not shock the market into a deeper retreat than the shedding of a handful of S&P 500 Index points.
So what gives?
Do investors really feel that the economy is robust enough to maintain its small rate of growth, even without the $85 billion per month in bond purchases the Fed presently makes each month?
Maybe.
Did the results of the Q1 earnings season really convince Wall Street that the Fed’s largess is no longer required, in spite of the fact that expectations were set pretty low to begin with?
Apparently.
Thursday’s slight retreat by the equity market was handily offset by Friday’s gains, which were mainly attributed to an improvement in the University of Michigan and Thompson Reuters Consumer Sentiment Index, coupled with a rebound in the Conference Board Leading Economic Index, a leading global business cycle indicator.
So according to investor sentiment, the latest dribbles of economic data trumps any fear of consequences that might result from the Fed actually tamping down on the stimulus spigot, the very thing that has goosed the market for the bulk of the last several years.
Go figure. Any contrarians out there might take last week’s market action as a cue to follow through on their long-simmering bearish plays.
Just beware of any obsessed Bulls…
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Sector Detector: Investors stay focused on their Silver Linings Playbook
by Sabrient - May 16th, 2013 2:08 am
Courtesy of Sabrient Systems and Gradient Analytics
It seems that every Tuesday in 2013 since January 8 has been positive on the Dow. And this past Tuesday was no exception. Now that sounds like a trend to put money on — buy the SPDR Dow Jones Industrial Average ETF (DIA) at the close each Monday and close out the position late on Tuesday.
The Dow and S&P 500 both hit new all-time highs once again on Wednesday, while the Nasdaq hit its highest level since November 2000. The “risk on” allocation of new investment capital into cyclicals continues, although Wednesday saw leadership from defensive sectors Consumer Staples, Utilities, and Telecom, along with Financials. Nevertheless, ConvergEx reports that the average correlation of the ten S&P business sectors to the overall index averaged 82% last month. While that is below the 86% average of the past few years, it is still quite a bit higher than what we expect of a “healthy” market.
Investors have been climbing a “wall of worry” by focusing on their Silver Linings Playbook. And there’s little doubt that the silver linings are growing more prominent. The US economy is improving while unemployment is falling. Bank balance sheets are solid while corporations enjoy historically high levels of cash, and they are deploying their cash for stock buybacks and acquisitions. Most retail investors are still on the sidelines with cash at the ready, and they are starting to show an appetite for equities. Housing is displaying sound footing as demand and prices both rise. Increasing asset values of homes and stock portfolios are creating a wealth effect that is spurring consumer spending.
Furthermore, corporate earnings have been growing, but there has not been much top-line growth as businesses have been reluctant to expand, choosing instead to rely upon cost-cutting and increased productivity. However, confidence in the global economy and increased consumer spending should eventually get them to start hiring again.
Another positive for the long-term health of the global economy is the boom in North American oil and gas production (primarily related to shale and oil sands, as well as to the impact of new technologies on extraction from mature fields). As the US gradually moves toward the Holy Grail of energy independence, it would remove a major obstacle to growth that the “peak oil” doomsayers have been predicting. North America’s emerging competitive…
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ETF Periscope: Bulls Roar Could Turn Hoarse in the Coming Weeks
by Sabrient - May 14th, 2013 11:52 am
Courtesy of Daniel Sckolnik, Sabrient Systems and Gradient Analytics
“If you simply try to tell the truth you will, nine times out of ten, be original without ever having noticed it.” — C.S. Lewis
Another week, another victory lap for the Bulls.
Anyone notice a pattern here? Technically speaking, at least, that pattern is a solid uptrend, with nary an imminent level of resistance close to the horizon.
The market continued its ascent into record-high territory, with all three of the major indices notching yet another set of weekly gains. Specifically, last week’s action saw the Dow Jones Industrial Average (DJIA) gaining 1%, the S&P 500 Index (SPX) rising 1.2%, and the Nasdaq Composite Index (COMP) notching a 1.7% rise.
So is anything standing in the way of the Dow adding another 6% or so and sending it up to the 16,000 mark in the near future? Or for that matter, is anything keeping the SPX from hitting 1,700 within the next several months?
Well, yes.
Aside from the myriad of macroeconomic issues that have recently simmered but not burned, such as China, Syria, and the Eurozone, the barrier to such a relatively unencumbered ascent just might be found directly on Main Street, as seen in the form of the upcoming retail and sentiment numbers that will be released over the course of the coming week.
First up will be Monday’s retail data, courtesy of the U.S. Commerce Department. Then on Friday, Thomson Reuters/University of Michigan consumer sentiment survey will offer a view of the economy from the public’s eye. Sandwiched in between and doled out throughout the week will be a series of earnings reports from the retail sector, including Walmart (WMT) and Macy’s (M).
For much of the last three weeks, the Q1 corporate earnings numbers over this time period have been similar to the overall earnings season, just good enough to support the uptrend that has been in effect so far this year. The same generally may be said regarding the economic data reported over this same period, such as from the housing sector and the jobs numbers. Taken together with the fact that Wall Street has quickly shaken off the shock of the atrocity in Boston on April 15, investors seem to have found no compelling reason to pull money from out of equities in a major way.
So will this week’s retail…
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What the Market Wants: A Puzzling and Irrational Market
by Sabrient - May 13th, 2013 6:37 pm
Courtesy of David Brown, Sabrient Systems and Gradient Analytics
The weekend’s worries that the Fed may be planning the end or slowdown of QE3 translated into a lackluster market performance with little movement in any of the major indices.
There was evidence of flight-to-safety as Healthcare, led by strength within Biotech’s, gained 1.7%. The only other positive sectors were Utilities and Non-Cyclicals. Today’s positive Retail Sales economic reading, up 0.1% contrasted to last month’s -0.5% and an expected -0.3%, had little effect on the market. Whether or not this small setback will halt the robust gain by the S&P 500 of nearly 6% over the past month with more than 8% by the NASDAQ probably depends more on the plethora of economic releases ahead this week. Price data across the board will give us the current picture on inflation, if any, tomorrow. On Wednesday, we will get a much more important looks at Industrial Production, Empire Manufacturing and Capacity Utilization. Thursday will tell us if last week’s improvement in Initial Jobless Claims holds up, along with CPI and in-depth housing data. That will be followed on Friday with Leading Indicators and the Michigan Consumer Sentiment. If the majority of these releases are positive and if common sense tells us that, of course, the Fed would be making its plans to phase out of the stimulus programs someday and somehow, then the last month’s equity rally will likely continue as money flows from money markets and fixed income into equities.
Last week was very different than today. Other than Friday, when the Fed rumors began to percolate, the market made solid daily gains led by growth stocks and especially small- and mid-cap growth stocks. Small-cap Growth led the way up 2.4%, while even the lagging Large-cap Growth gained 1.34% in last place. Growth sectors Consumer Cyclicals, Industrials and Technology were all up 1.75% or better on a weighted basis with Utilities falling 1.78% as the only losing sector.
Our forward-looking Sabrient SectorCast is still a bit cautious, led by Financials, Cyclicals and Healthcare. Technology remains suspect at the bottom of that 30-day future look, but Utilities are just a tad better. It is very likely it is the predicted PC “fall from grace” that is triggering that outlook. We recommend continued positions in growth at a reasonable price.
3 Stock Ideas for this…
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Sector Detector: Bulls start their move into cyclicals
by Sabrient - May 9th, 2013 12:27 am
Courtesy of Sabrient Systems and Gradient Analytics
The S&P 500 is up 14.5% year-to-date through Wednesday, and the defensive sectors like healthcare, consumer staples, and utilities have done even better. But so far in May, the leaders have been industrials, consumer discretionary, energy, materials, financial, and technology. I said last week that new highs were on the horizon, but that a rotation into economically-sensitive sectors, and from value into growth, would be needed to provide fuel for the next leg up. Such a rotation appears to have begun, and the major averages have indeed broken out to new highs.
To be sure, many market commentators have been screaming that a major correction is imminent. And the higher the bulls take it, the worse it will fall, they say. Also, consider that over the past 23 years, the Dow has reverted back to its January opening value at least once during each of those years, and 20 of those years saw a decline greater than 5%.
But this time might be different. I know, I know, those are famous last words. But stocks have consistently demonstrated the ability to simply churn in place to work off overbought conditions. Furthermore, consider that the market has been driven so far this year by a collaboration of reluctant bulls unhappy with the alternatives to stocks, bond refugees seeking higher income, a generally positive trajectory in the economic reports, and corporate stock buyback programs driven by the Fed’s cheap money. So, this might be just the start of a real “risk on” allocation of new investment capital into cyclicals.
If so, that’s a healthy sign of investor confidence in the US economy and in the stock market as a place to invest for the longer term. Even better, investors appear to be a broadening into cyclical sectors rather than rotating. The defensive sectors are holding up even with their lofty valuations, while the cyclicals are rising. Because defensive stocks generally offer a reasonable yield, we won’t necessarily see money flee those sectors. It all looks bullish for stocks.
Looking at the chart of the SPY, it closed Wednesday at 163.34. After a couple of tries during April at breaking through psychological resistance at 160, SPY indeed broke out with gusto. The catalyst was encouraging reports on jobs and unemployment. Oscillators like RSI, MACD, and Slow Stochastic all made…
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What the Market Wants: Risk Remains On
by Sabrient - May 6th, 2013 6:42 pm
Courtesy of David Brown, Sabrient Systems and Gradient Analytics
The market enthusiasm generated by the positive employment report on Friday carried over to today. The rally in Technology stocks continued from last week, but Financials did even better. With the Nikkei and FTSE both closed, the off-shore action ended slightly more positive than negative. We had no domestic reports today in what will be a quiet week of economic news with only Thursday’s Initial Jobless Claims and Wholesale Inventories Reports, following tomorrow’s Consumer Credit report.
Last week’s generally positive news should carry in this week, barring any major shake-ups from global hot spots. Positive Personal Spending and robust increases in Case-Schiller HPI and Consumer Confidence paved the way for the strong employment reports last week. Only Chicago PMI, Personal Income, and Construction Spending kept the week from a break-out rally. But one can’t complain about the 2% rise in the S&P 500, which reached new all-time highs today along with a 3% gain in the NASDAQ, as techs carried the week.
In addition to Financial and Technology stocks, Energy did well today as oil and gas bounced to positive closes after weak openings. So, without a negative surprise, it is likely that equities will continue to rise as funds flow from the dangerously risky bond market (note Buffet’s comments today on bond risk). Our study of valuations continues, but it appears that while clearly above average, valuations are well off former highs. Hopefully, we will have more specifics on valuation by next week.
What do the equity markets favor? Well, last week all style/caps did well, but the best was Large-cap Growth, up 2.5%, and the worst was Large-cap Value, up 1.4%. In general, growth fared a bit better than other styles, except for small-caps. With Utilities and Heathcare bringing up the bottom of the sector performances, it’s clearly been a risk-on market, particularly in the Technology and Financial sectors.
4 Stock Ideas for this Market
I select the following stocks with GARP in mind:
AGCO Corporation (AGCO) – Industrials
- Trading for 10.32x current earnings and 9.25x forward
- Recent upward analyst revisions to EPS estimates
- Projected EPS growth: -13% current quarter, 25% next quarter
Macy’s Inc. (M) – Consumer Cyclical Goods
- Trading for 14.2x current earnings and 10.4x forward earnings
- Projected EPS growth:
…
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ETF Periscope: VIX May Be Low, But High Volatility Continues to Lurk
by Sabrient - May 6th, 2013 2:12 pm
Courtesy of Daniel Sckolnik, Sabrient Systems and Gradient Analytics
“So be sure when you step. Step with care and great tact. And remember that Life’s a great balancing act.” -- Dr. Seuss
The market has gone back to its Bullish ways, resuming the upward trajectory that has been effectively going on for most of the year, as represented by the 13% gain to date of the S&P 500 Index (SPX).
An anticipated correction looked like it might go into effect mid-April, with the Boston Marathon bombings serving as the catalyst. Yet the Bulls righted their ship with surprising haste, while the Bears have found themselves mainly back on their posteriors since that brutal event unfolded.
The market’s upbeat sentiment was revealed last week in the major indices bottom lines, as the Dow Jones Industrial Average (DJIA) ended up gaining 1.8% on the week, while the SPX added 2.0%. Meanwhile, the tech-laden Nasdaq Composite Index (COMP) continued on its recent tear, once again outperforming both the SPX and the Dow. The COMP ended up with a gain of 3% over the same time period.
As reflected in last week’s market performance, investors seem to be sticking to the majority POV that, generally speaking, the fair-to-middling Q1 corporate earnings numbers that have emerged over the last several weeks have managed to trump the ongoing mediocre domestic economy data, such as last week’s combination of decent jobs numbers being somewhat muted by poor factory orders data.
The current upbeat perspective has, no doubt, been heartily maintained as a response to the ongoing promise from the Fed that its overworked printing press will not downshift any time real soon.
At this point in time, close to 80% of the S&P 500 companies have already reporting earnings. So even if the remaining batch of earnings reports proves to be slightly more negative than expected, they still might not impact the market in a meaningful way. Unless, of course, a sudden, collective burst of missed earnings numbers emerge, which in turn could become amplified by a string of negative projections from those same offending corporations.
One number that shouldn’t be much of a surprise, however, at least relative to the upward equity trend, is that of the Chicago Board Options Exchange Market Volatility Index (VIX), which was hovering under the 13 mark as of the end of last week. While the VIX, commonly referred…
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Sector Detector: Knock, knock, knocking on new highs … but running on fumes
by Sabrient - May 2nd, 2013 1:10 am
Courtesy of Sabrient Systems and Gradient Analytics
Stocks finished the month of April breaking to new highs, with the S&P 500 rising above 1597. But May Day selling put a temporary hold on the bullish celebration that will certainly occur if the S&P 500 can make a clean break above psychological resistance at 1600. Was May Day the start of the usual “Sell in May and go away” practice? Time will tell, and there’s little doubt that stocks appear to be running low on fuel at this point.
But my bet is that new highs are coming sooner than later. Stocks have shown an impressive propensity to simply churn in place when many observers expect a major correction.
On Wednesday, the Federal Reserve announced that it would maintain its bond purchase program at $85 billion per month and keep its interest rate target at zero to 0.25%. Weak economic reports like the ADP payroll report and manufacturing suggested that the economy is still struggling. Next up is the European Central Bank policy announcement, in which it is expected to lower its main interest rate by 25 bps to 0.5%.
Although corporate earnings generally have been beating estimates, revenue growth has lagged. Some analysts are worried that companies’ ability to continue propping up earnings through cost-cutting and productivity gains will become more difficult going forward.
Apple (AAPL) caused quite a stir this week when it rolled out the largest non-bank bond deal in history, $17 billion. The firm intends to use the funds to return as much as $100 billion in cash to its shareholders. Before this, AAPL was the only major technology company without any debt on its books.
This year’s rally continues to be led by defensive sectors healthcare, utilities, and consumer staples. Looking at the iShares US sector ETFs, Healthcare (IYH) and Utilities (IDU) are both up 18.4% year-to-date through May 1, and Consumer Goods (IYK) is up 16.5%. Compare this to the SPDR S&P500 Trust (SPY), up 11.6%, and the Guggenheim S&P 500 Equal Weight (RSP), up 13.0% YTD.
Moreover, let’s compare some low-volatility ETFs. Guggenheim Defensive Equity (DEF), which tracks the Sabrient Defensive Equity (DEF), is up 15.9% and the PowerShares S&P500 Low Volatility (SPLV) is up 16.4%. These defensive plays are generally expected to lag when the market is strong like it has been. But instead they…
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