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The markets looked to rebound today after Thursday’s losses. While giving up some of the early morning gains, the S&P 500 and Dow Jones Industrial Average managed to increase 0.46 and 0.36 percent, respectively. For the week, the S&P 500 fell 0.5 percent, while the DJIA rose 0.1 percent. The technology heavy NASDAQ fared far worse, down 2.8 percent. As it turned out, it was the worst weekly stretch for index in 15 months.
Without a doubt, it has proved to be a challenging week for the markets. First, economic data came in weaker than expected. New home sales fell 3.3 percent in February, coming in at an adjusted annual rate of 440,000, lower than analyst forecasts. Additionally, January’s report was also revised lower, down to 455,000. Existing home sales, which account for the vast majority of purchases, also fell for the second consecutive month. With the Federal Reserve indicating rate increases coming in the near future, a broader pickup in the economy will be needed to offset higher mortgage rates.
On Monday, the Markit preliminary U.S. Manufacturing Purchasing Managers Index (PMI) fell to 55.5 after posting a 57.1 report last month. While it was below analysts’ expectations of the 56.6, it is still well ahead of the 53.7 we saw in January. Moreover, the services sector picked up with a reporting of 55.5, up from 53.3 in February. The composite index of both manufacturing and service sectors came in at 55.8, and improvement of over the 54.1 reporting. Placed in context, any report over 50 shows a growing economy even if it is a slow rate.
Markit’s Chief Economist, Chris Williamson summarized the indicators by stating in his commentary:
“Service sector activity rebounded in March after a weather-torn February, but the survey is clearly flashing some warning lights as to whether the economy has lost some underlying momentum and that growth could slow in the second quarter.”
“Even with the rebound, the two PMI surveys are merely consistent with annualized GDP growth of approximately 2.5% in the first quarter, largely unchanged on the disappointing 2.4% rate seen in the fourth quarter of last year.”
After Williamson’s comments, it was announced that fourth quarter GDP growth was revised up from 2.4 to 2.6 percent. The driver behind the revision was the largest uptick in consumer spending in three years. This certainly provides a positive sign, but due to the harsh winter, we do not expect to see an improvement on those numbers in Q1 2014.
Taking that into consideration, the National Association for Business Executives (NABE) stated that while we will have slow growth over the short-term, it should accelerate as the year goes on. For 2014, they expect real GDP growth to be 2.8 percent, followed by 3.1 percent growth in 2015. The also view the probability of another recession to be 15 percent.
Over the short-term, we expect to see an increase in volatility, especially if the Q1 earnings season has companies providing results that miss expectations. As we track in our Global Momentum Guide, the short-term leaders have retreated. Biotechnology stocks were sold off continuously over the week, and are down significantly again today. While this is disconcerting for investors, remember there was a large sell-off from January, before the sector again rallied.
We have recommended biotechnology in our models for some time and have enjoyed a healthy return over that period. As biotechnology has historically been very volatile, investors must be comfortable with weeks where the funds may increase or decrease by 10 percent in only a few trading days. For investors who have seen returns of 50 percent or more in this sector, you want to be careful these positions are not outsized relative to the rest of your portfolio. If they are, you may want to take profits and move those gains to more conservative options.
Technology has also lost ground. Google (GOOG) suffered its worst week in more than two years. Social media stocks struggled as well, with Facebook (FB) sliding more than 10 percent. Some Internet funds have fallen for three straight weeks; two of the Internet ETFs we track in the Global Momentum Guide have lost value on 12 of the past 15 trading days.
Important Note: You can view the latest momentum rankings, plus buy and sell recommendations each Monday on our website.
Despite the lackluster reports, as a whole the broader indexes held up very well. Keep in mind one good week can push the S&P 500 Index to another new all-time high. Ultimately, losses were concentrated in the more volatile sectors of the market. This is a good sign. Furthermore, some technology sub-sectors are nearing technical support levels and many have become oversold, indicating a bounce next week is likely.
Two Important Updates from the Mutual Fund Investor Guide:
Finally, we would like to update you on some additional tools that can help you manage your investments:
Please find the data and portfolios for our newest publication, the Global Momentum Guide. While we finalize the publication, we will make this content available to be viewed complimentary for a limited time.
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Global-Momentum-Guide-March-24-2014
The following are the top momentum performers for this week.
Fidelity Select Sector Funds
1. Biotechnology (FBIOX)
2. HealthCare (FSPHX)
3. Pharmaceuticals (FPHAX)
4. Electronics (FSELX)
5. Software (FSCSX)
6. Medical Equip (FSMEX)
7. Transportation (FSRFX)
8. Technology (FSPTX)
9. Air Transport (FSAIX)
10. Comm Equip (FSDCX)
ETF Sector Funds
1. Claymore Solar Energy (TAN)
2. SPDR Biotech (XBI)
3. FrTrust Biotech (FBT)
4. iShares NASDAQ Biotech (IBB)
5. US Natural Gas (UNG)
6. SPDR Pharmaceuticals (XPH)
7. PShrs Clean Energy (PBW)
8. PShrs NASDAQ Internet (PNQI)
9. FrTrust DJ Internet (FDN)
10. FrTrust Global Wind (FAN)
ETF International
1. MV Egypt (EGPT)
2. iShares Denmark (EDEN)
3. Glb X Greece 20 (GREK)
4. WTree Euro Sm Cap Div (DFE)
5. iShares Ireland (EIRL)
6. MV Gulf States (MES)
7. PwrShrs Golden Dragon (PGJ)
8. iShares MSCI Italy (EWI)
9. MV Vietnam (VNM)
10. iShares Spain (EWP)
Investors will continue to digest the Federal Reserve’s policy decision over the next few days. Last week saw shares dip on Wednesday, the day of the policy statement and Janet Yellen’s press conference at which she let slip that interest rates could rise in early 2015 (depending on the data). Shares rallied on Thursday, but then slipped on Friday as some momentum leading sectors such as biotechnology took big hits.
China provided a boost late last week when the securities regulator announced it would allow the issuance of preferred shares. Bank stocks, likely to need another round of capital infusions, rallied sharply on the news. Qualified foreigner investors also saw regulations eased: they will not be able to buy up to 30 percent of a company’s shares, an increase of 10 percentage points. Regulations on the Chinext market of small and emerging companies were loosened as well.
Macro and real estate news out of China did not improve, however, and this week will be a test for the market. Copper remains an important commodity to watch here. The metal was whipsawed up and down last week as it tried repeatedly to break above $3, only to get pushed back into the low $2.90s. A move above $3 would signal traders do not believe there is systematic risk from China’s ongoing defaults. A break to a new 52-week low for copper would bring out sellers and pull all asset markets lower. Also worth paying attention to is the Chinese yuan. It remains under pressure and a further devaluation below the 6.24 level could set off a new round of selling. Finally, investors should keep an eye out for some government reform or stimulus announcements. The news on Friday led to a big rally in mainland shares and the government may decide to issue more such pronouncements in a bid to push asset markets higher.
Economic Reports: The Case-Schiller housing index for January is out this week. Consumer confidence for March, new home sales and building permits in February are on tap. Look for flash PMI numbers for China and the U.S. as well.
Earnings: Walgreen (WAG), Carnival (CCL), Paychex (PAYX), Blackberry (BBRY) and Lululemon (LULU) report this week. A large number of important China-listed companies also report this week, everything from banks to automakers to coal miners, which will add to volatility given the heightened awareness of China’s economic situation.
ETF Investor Guide March 2014 Market Perspective: Will China Slow the U.S. Bull Market Run? As expected, it has been a volatile month for stocks. In the middle of February, stocks were […]
