Courtesy of John Nyaradi
Over the past several weeks, major equity markets have been in a sideways range while precious metals have been making headlines with parabolic moves. However, almost unnoticed, a stampede from growth sectors to conservative sectors has been well underway.
On My Radar
Taking a look at the big picture from a technical standpoint, we see the following concerning the S&P 500.
chart courtesy of StockCharts.com
In the chart above we can see that the 2 Day RSI is overbought and MACD is on a “sell” signal which would point to the probability of a downside move ahead.
Furthermore, we see the price hovering around the 50 Day Moving Average which is resistance/support and that the average itself is starting to flatten out.
And finally we see the range between resistance at the 1320 level and support around 1300 which leaves us in a narrow trading band.
Looking to the Point and Figure Chart of the S&P 500, we see a similar picture.
chart courtesy of StockCharts.com
In the P&F chart we see support at 1250, resistance at 1330 and that we’re still on a “sell” signal with a downside price objective of 1160 using point and figure methodology.
The View From 35,000 Feet
As I mentioned at the outset, a quiet stampede has been taking place away from risk or growth sectors to safe, or lower risk sectors, and this move has been underway since late March/early April.
The major risk/growth oriented sectors set recent highs in late March/early April and since then have put in the following declines:
Materials: (XLB) -3.8%
Energy: (XLE) -3.9%
Industrials: (XLI) -2.4%
Technology: (XLK) -1.4%
These moves have garnered little notice but very often shifts in sector sentiment like these precede corresponding moves in the major indexes.
Another dead giveaway of risk aversion is recent action in the bond markets which were in steady decline and now have suddenly reversed course with TLT, the 20 Year Bond, ETF up approximately 3% in the last five trading days.
Economic and earnings data points were mixed this week and looked like this:
Positive:
ü Industrial production climbed 0.8% from a previous 0.1%
ü Capacity Utilization climbed.
ü Michigan Consumer Sentiment rose
Negative:
ü MBA Mortgage Index declined
ü March Retail Sales rose 0.4% vs. 1.1% previously
ü Initial Unemployment claims rose to 412,000 vs. 385,000 previously
ü Google, Bank of America, Alcoa reported earnings disappointments
The employment picture remains dismal with a surprise uptick in unemployment claims to above 400,000 for the week, while last year just 45% of Americans had a job which was the lowest since 1983.
Congress and the President stepped up their wrangling over the deficit and how and where to cut, with Representative Paul Ryan and President Obama laying out starkly different views that should make for interesting discussions as the deadline for raising the debt ceiling rapidly approaches.
Overseas a Greek default is looking more and more likely with bondholders perhaps looking at a 50-70% haircut as the German Finance Minister seemed to warm to the idea of a “restructuring” of Greek debt (read default) and Ireland’s credit rating was cut yet again by Moody’s.
Greece has slipped back into recession with 15% unemployment while the austerity program in Britain isn’t going so well either with retail sales dropping to the worst levels in 15 years and real incomes continuing to drop, as well.
The Euro took a big drop on Friday and the 10 Year Bond in Greece reached 13.8% and record spread levels with the benchmark German bund. The Euro could also be in for rough sledding this week as it looks like the Sunday election in Finland will offer significant gains for the True Finns who take an opposing view to European Union bailouts of the periphery nations which could bode ill for Portugal, et al in weeks and months ahead.
Finally, gas prices have breached the $4 level in Hawaii and in California and gold hit an all time high with silver at its highs in the last 30 years and this week brings a blizzard of earnings reports from more than 100 S&P 500 companies.
What It All Means
All in all, we continue to see a very weak picture technically and a significant rotation out of risk sectors to Utilities and Consumer goods along with a spike in bond prices, all of which points to increasing fear in the marketplace, regardless of the ongoing happy talk from the Fed and others about how inflation is contained and growth continues to be on an upward trend.
The fundamentals remain iffy, at best, with significant problems in Europe and Japan and our own debt problems at home. Finally, a number of significant downgrades to 1st Quarter GDP projections are popping up, and with that report due April 28th, the next couple of weeks could be interesting, to say the least.
At Wall Street Sector Selector, most of our positions enjoyed small gains this week and we anticipate more downside ahead.
The Week Ahead
Major Issues/Themes: As briefly mentioned a moment ago, earnings reports, along with major economic reports will dominate the domestic landscape while the situation surrounding Greece will likely cast an ever growing shadow over Europe.
Monday: NAAB Housing Index, earnings reports from CitiGroup, Bank Of New York.
Tuesday: March Housing Starts, March Building Permits, earnings from Intel, Johnson and Johnson, Yahoo, Goldman Sachs
Wednesday: March Existing Home Sales, earnings from Apple and Delta Airlines
Thursday: Initial Unemployment Claims, Continuing Claims, April Philadelphia Fed report, March Leading Indicators, earnings from Morgan Stanley, General Electric
Sector Spotlight
Leaders: (NYSEArca: SLV) iShares Silver (NYSEArca: IBB) iShares Biotech
Laggards: (NYSEArca: EPU) iShares Peru Index (NYSEArca: IEO) iShares Oil and Gas
Have a great week and we’ll talk soon,
John
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