Year: 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.  Software  (FSCSX)
5.  Electronics  (FSELX)
6.  Medical Equip  (FSMEX)
7.  Technology  (FSPTX)
8.  Transportation  (FSRFX)
9.  Air Transport  (FSAIX)
10. IT Services  (FBSOX)

ETF Sector Funds

1.  Claymore Solar Energy  (TAN)
2.  SPDR Biotech  (XBI)
3.  iShares NASDAQ Biotech  (IBB)
4.  FrTrust Biotech  (FBT)
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. Global X Social Media  (SOCL)

ETF International

1.  MV Egypt  (EGPT)
2.  iShares Denmark  (EDEN)
3.  WTree Euro Sm Cap Div  (DFE)
4.  iShares Ireland  (EIRL)
5.  Glb X Greece 20  (GREK)
6.  PwrShrs Golden Dragon  (PGJ)
7.  MV Gulf States  (MES)
8.  MV Vietnam  (VNM)
9.  iShares Spain  (EWP)
10. iShares MSCI Italy  (EWI)

China, Ukraine and the Federal Reserve meeting will be the three big stories this week.

On Monday, shares had stabilized in China along with the rest of Asia. Copper prices were still stuck below the $3 level, but higher volatility and a positive trend could push the price higher. Over the weekend, the Chinese central bank increased the trading band on the yuan, allowing the currency to fluctuate up to 2 percent each day (from 1 percent previously). Traders responded by pushing the yuan lower in Hong Kong.

Faced with increasing numbers of defaults and worried about systematic risk, the pressure will be on the side of devaluation. This opens up a new avenue for risk since most investors still expect the yuan to increase versus the U.S. dollar. Also, even if they expect a decline, most analysts think the yuan will not fall further than 6.24 yuan to the U.S. dollar. That is only a drop of 1.3 percent away from becoming a reality, and that drop can now occur in one day. One bad day for the Chinese currency could have a significant short-term impact on global markets.

Aside from China, there is the situation in the Ukraine. This issue will not be as important to the markets unless the situation deteriorates further, which still seems unlikely. In our view, this is a distraction by Washington politicians as they cannot reach agreements on other issues. The Republicans, with good reason, believe they will have the Senate in 2015, and that would allow them to completely change the legislative agenda. President Obama’s economic agenda consists of political issues designed to stem the losses in November, but that will have little positive impact on the overall economy in the near future.

Finally, the Janet Yellen-led Fed is expected to taper again this week. Economic data was weak in January and February, but not so weak as to require a slowdown in the taper. Public statements by Fed officials also lean towards either a faster taper or even guidance on when interest rates will begin moving higher, though this is likely to come later in the year.

Economic Reports: It’s a light week for earnings reports and the Fed meeting will dominate.

Earnings: This is the last big week for earnings before the Q1 earnings season kicks off in April. FedEx (FDX), Oracle (ORCL) and Nike (KNE) all report this week. FedEx is always closely watched as an economic barometer and investors will look closely to see if there are weather related effects on its business. Oracle is also sometimes seen as a technology bellwether. Finally, two homebuilders, Lennar (LEN) and KB Home (KBH) report this week. Homebuilders have suffered in March, losing all their gains for the year.

We were expecting the markets to begin pricing in the current risks associated with China and Ukraine. The move occurred on Thursday, as the Dow Jones Industrial average fell 1.4 percent, the S&P 500 fell 1.2 percent and the NASDAQ fell 1.5 percent.

Most of the economic data in the U.S. was strong, with jobless claims coming in below expectations. The U.S. remains mired in a weak recovery though, and with emerging markets weakening the past couple of years (and especially since the Fed announced the taper in May 2013), China is the last remaining engine pulling the global economy forward. If China weakens, demand for many imports such as commodities could collapse due to massive Chinese stockpiling of resources.

The risk from China is also great because the economy is in the midst of rebalancing. This week the head of the central bank said interest rates will be fully liberalized in one to two years. Right now we’d speculate this change will be on the early side as financial innovation is occurring at a rapid pace in China. The Chinese equivalents of Ebay, Amazon and Twitter are now in the banking business, offering money markets to users with much higher interest rates than banks. Banks themselves offer various high-yield products to investors as well, but last year less than 50 percent of new loans came from the traditional banking system. Private banks are also being opened by some of these same firms, and they are working on online banking as well as virtual credit cards.

These structural changes illustrate the Chinese economy has entered another stage of reform. Even if there is no crisis in China, there very likely will be a slowdown due to the fall in investment and the rise in consumption. A crisis is possible during this transition phase, but crisis or not, Chinese demand will shift away from imported resources and towards imported and domestically produced consumer goods and services.

Investors wanting to keep an eye on the situation can look to copper, oil and the exchange rate of the Chinese yuan, which fell again today. Gold is likely to do well in a crisis because weakness in China leads to a lower yuan, which results in higher gold prices. It is much easier for Chinese to buy gold than it is to buy U.S. dollars, so as long as gold can remain flat or rise, Chinese buying is likely to continue. It may even accelerate in a crisis situation as Chinese look to hedge against yuan weakness.

Domestically, the leading sectors such as solar, biotechnology and social media took big hits during Thursday’s sell-off. That’s normal for these volatile funds, but these funds bear close watching because they will give an early signal as to whether this sell-off will continue or whether the sell-off yesterday was an isolated short-term event.

The U.S. can plod along fine if global markets cooperate. The drop in copper this week sends a warning that they may not. If the metal can climb above $3, its long-term support level, markets will reverse along with it. If it struggles to rally, it will be a cloud over the market. Its weakness may not be enough to damage the bull market, but it could slow market gains in the coming weeks.

China drove the markets two weeks ago, while the Ukraine was the big story last week. Looking at the week to come, it appears we may both issues in tandem.  Thus far though, only the Chinese news is impacting markets in any significant manner, and only in Asia.

Global asset markets have acted very differently in recent weeks. Asian markets dropped on concerns about China, but European markets responded to the situation in Ukraine. Early Monday was no different: Chinese shares slumped nearly 3 percent on reports that China had a large trade deficit in February, but Europe opened higher due to the lessening of some tension in the Ukraine.

China’s export report poured fuel on the fire caused by the first domestic bond default in the reform era last Friday. Copper prices plunged over concerns that China’s massive stockpiles will be sold to cover bad debts. Copper is now flirting with a major support level of approximately $3.00 per pound, while the Shanghai Composite has fallen to 2000 once again. This level was hit in autumn 2012 and again in summer 2013. Bulls interpreted this testing of support as a double bottom, and now there is a chance it will test a triple bottom. There are already calls for a stimulus program to help the economy. The other possibility is that the market drops another 15 percent and challenges the lows of 2008, in which case there will be global financial turmoil.

In Ukraine, the Russian population of Crimea wants to rejoin Russia. This has put the issue back on top of the headlines, but there is little chance of escalation at the moment. The United States went to war in Kosovo to secure independence for that nation from Serbia, something the Russians do not forget because they strongly opposed that war. Given that the Russian dominated Crimea region was given to the Ukraine by Russia in the 1950s, it’s unlikely the U.S. or its allies will escalate the conflict to prevent a reunion. The main threat is Ukrainian nationalists could attack Russian forces in the country and set off a civil war. Since natural gas flows to Western Europe via Ukrainian pipelines, the economic impact of even limited military action would be grave if the pipelines were damaged.

Meanwhile, back in the U.S. economic data continues to plod along. The main indexes pushed to new highs last week, with the Dow Jones Industrial Average the last remaining holdout. Domestic shares could pull back this week though. They are nearing overbought levels and they have not priced in problems in China and Ukraine.  Even if we experience a pullback, the U.S. remains best suited to endure any volatility.  We don’t expect a near-term correction to be the beginning of something larger.

Economic Reports: Economic data has been weaker than expected in 2014, down from the inflated levels anticipated late last year, but consistent with the “new normal” post-2008. On Wednesday, the federal budget for February will be out. If the economy is weaker or stronger than believed, it will show up in a larger or smaller than expected deficit. Retail sales for February are out on Thursday.

Earnings: American Eagle Outfitters (AEO) and Dollar General (DG) highlight a very light week for earnings reports.

The Russell 2000 enjoyed another strong week as the index rushed through the 1200 level, heading on to new highs along with the other major indexes. The Dow Industrials was notably not among them. Construction spending was better than expected, as were the manufacturing numbers out this week, but overall the move to new highs seemed like a relief rally following the easing of tensions in Ukraine.

The stock market now looks very close to a pullback or a sideways trading period, at least in the next week or two. Stocks have rallied sharply from their lows in early February; the Russell 2000 is up 12 percent versus an 8 percent rally in the S&P 500 Index. The S&P 500 Index is only up 1.55 percent for the year, so a small pullback or a couple weeks of sideways trading would keep it flat for the year. We don’t speculate on short-term market moves, but the technical indicators are signaling that the market will take a breather soon.

Longer-term, investors appear to discount the risk from the Federal Reserve’s decision to taper bond purchases. Although the Federal Reserve has stated it will keep monetary policy loose for an extended period of time, it is tightening monetary relative to its peak easing policy from only a few months ago. Given the strength in the asset markets and the solid manufacturing data of late, the Fed will likely reduce asset purchases once more at the March meeting (March 18 to 19). The effects of an even tighter policy will first be felt in emerging markets, but eventually the effects will make their way back to the United States. The result will be either an economy following manufacturing numbers and showing improvement, whereby pushing up rates, or the economy will weaken and asset prices will suffer.

In China there was the first domestic bond default perhaps since the recreation of bond markets during the past 30 years of economic reforms. Financial markets shrugged off the news, but commodities were hit, with copper and iron ore falling in price. China’s central bank has been even more aggressive than the Fed in tightening monetary policy. The banking system is flush with cash at the moment, but this may be in part due to investors exiting the trust market for the safety of large state-owned banks. In the next few months, China will enter a period of heavy debt repayment that will last into 2016, but defaults are already an increasing concern. Any misstep would rattle global financial markets, particularly markets such as U.S. equities that have pushed to new highs.

One sector we’re keeping an eye on is biotechnology. The sector tumbled on Thursday for “no reason”, in the sense that there was no news to trigger a sell-off. Biotechnology stocks are still sitting on huge gains in 2014 even after selling off this week, and they’re only down about 5 percent from the peak. Other momentum leading sectors, such as social media and solar, have not broken down. What makes the drop interesting is that there was no news, which implies it could be due to a shift in short-term investor sentiment. However, given the huge advance in biotech shares this year, the sector could fall another 10 percent and it would still be outperforming the S&P 500 Index for the year.