The S&P 500 Index gained 1.51 percent over the past month and is up 1.22 percent this year through May 15th. The Dow Jones Industrial Average gained 1.1 percent, and […]
For yet another month it was a volatile period for stocks. Through the 15th of May three of the four major indexes ended positive. The Russell 2000 was the lone […]
While the week started off strong as the Dow again set a new record closing of 16,583.34, the markets have shed their gains over the past few days. The S&P 500, which also set a new high, stumbled as well. The markets did rally a bit today as the Dow was up 0.3 percent and the S&P 500 gained 0.4 percent. For the week the markets were down, continuing a trend of choppy trading we have seen throughout the year.
With the Dow and the S&P 500 hitting new all-time highs, it is reinforcing our belief that the bull market is still intact. Weakness in small caps remains but did show some resiliency today as the Russell 2000 gained 0.63 percent. Despite the negative action over the past few days and continued underperformance of the Russell 2000, we expect the market to again move higher over the coming weeks.
One of the most significant economic stories of the week took place in India; the Bharatiya Janata Party (BJP) secured the biggest electoral victory in 30 years and dealt a stinging blow to the ruling Congress party. The BJP is the first party to have a majority in parliament since 1984, and with coalition partners, they will control more than 60 percent of the legislature. Incoming Prime Minister Narendra Modi led his state to double digit GDP growth over the past decade and he won largely on the desire by the public for a stronger economy. Given the size of India’s role in the region, the election is a major shift and may have an important impact for a decade or more.
Domestically, economic data was generally in line with expectations, although some reports were weaker than we would like to see. Industrial production was negative 0.6 percent and the National Association of Home Builders/Wells Fargo sentiment index fell to 46, the lowest reading since May 2013. If reports continue to be subpar it could become a worrisome sign given that a pick-up in activity is expected over the rest of the year.
Additionally, investment bank economists have reduced their first quarter GDP estimates into negative territory based on weak data from March. If we don’t see the pick-up soon, second quarter GDP estimates may start to decline. On Friday, data turned positive though, with multi-family housing construction permits reaching a 4-year high.
The decline we’ve seen in interest rates seems to be partly driven by the weaker economic data during the first quarter. For now, bond investors are concerned the taper will mean slower economic growth and lower inflation, leading to the purchase of government bonds. Nevertheless, there will be pressure on rates to move higher, so long as the economy stays out of a recession. While long-term bonds have performed well this year, we continue to urge caution. If a rate jump does occur, many of these funds could drop quickly in value.
The Dow and S&P 500 indexes climbed to new highs in the past week and this has tipped the balance in favor of the bulls. It is now up to the Nasdaq and the Russell 2000 to follow this trend. The NASDAQ appears to be forming a short-term bottom here and looks ready to turn higher over the next week, which is a positive sign.
SPDR
SPDR Financials (XLF)
Recently, we have looked at financials, the second largest sector in the S&P 500 Index. As the chart below shows, financials are climbing back above their 50-day moving average, a good sign for the overall market as it is the second largest sector.
SPDR Technology (XLK)
The largest and most important sector in the S&P 500 is technology, and it followed the broader indexes to a new high this week. This is also very positive for the Nasdaq, although beaten down subsectors such as Internet and social media stocks haven’t broken their downtrends. Biotechnology also remains weak, though it did show indication of improvement over the past week.
iShares Transportation Average (IYT)
A very bullish sign over the past week was transportation moving higher at the same time as industrials. Although the market was already in a primary bull trend, new highs on these two indexes signal that the bulls are seeing opportunities. Importantly, the breakout in the transportation index is very strong and broad: airlines and railroads both made new highs along with the index.
SPDR Utilities (XLU)
Utilities have underperformed this month. The simplest explanation is that investors are rotating out of one of the most defensive sectors. However, there’s still a case to be made that utilities are headed for a period of outperformance relative to the S&P 500 Index, given the length of the bull market and utilities consistent underperformance until the start of 2014. Relative to the S&P 500 Index, utilities are still in an uptrend but if they continue their relative underperformance, the uptrend could soon be in jeopardy.
Market Vectors Coal (KOL) Global X Copper Miners (COPX)
Besides energy, materials stocks have done well in 2014 and they have been coming on stronger of late. Earlier this year, we were genuinely worried about the economic slowdown in China. Copper prices in particular broke below a major long-term support level and there was risk of an accelerating decline. While the economic data out of China remains negative, the markets are disagreeing with the reports and sending commodity prices higher, along with resource equities. Since markets tend to move ahead of the news, this is a good sign. These ETFs still have further to go before they establish a clear bullish pattern but they look much better today than they did two months ago.
KOL is one ETF to follow this week. On Monday, many coal stocks gained 10 percent on Mainland China’s exchanges (stocks are limited to moving 10 percent in one day). Shares of Chinese companies listed in Hong Kong and the U.S. also bounced on the news. A pullback appears likely, but this could be the start of a larger bullish move.
The coal sector has done terribly over the past few years in China. Now, due to China’s growing problem of bad debt, even a major state-owned coal mine has lost its access to bank credit. Instead of sensing doom though, investors bid up shares in the sector as it appears the Chinese government will allow the market to reshape the industry. KOL has 22 percent exposure to Chinese coal producers.
