Month: August 2016

SPDR S&P 500 (SPY)
SPDR DJIA (DIA)
PowerShares QQQ (QQQ)
iShares MSCI Japan (EWJ)
iShares MSCI Germany (EWG)
iShares MSCI Emerging Markets (EEM)

Major indexes hit new highs on Monday before dipping on Tuesday and Wednesday. The second highlights August’s strongest trends thus far. Germany and Japan remain far behind, but have recently accelerated as the S&P 500 lagged, though only emerging markets have consistently outperformed the S&P 500 Index this year.

Last week we compared QQQ to First Trust Nasdaq 100 Equal Weighted (QQEW). As illustrated below, QQEW started outperforming after August 10 and made an important new all-time high over the past week to indicate a broadening rally.

Fidelity Floating Rate High Income (FFRHX)
DoubleLine Core Fixed Income (DLFNX)
Thompson Bond (THOPX)
Fidelity Corporate Bond (FCBFX)
Fidelity High Income (SPHIX)

Oil continued to buoy high-yield bonds over the past week. West Texas Intermediate Crude oil has spiked 18 percent over the past two weeks, benefiting high-yield credit. Investment-grade and corporate bonds traded sideways after last week’s increasing rate hike expectations.

Sector Performance

The Fed’s latest meeting minutes were released on Wednesday and signaled a possible shift towards more hawkish interest rate policy. A December rate hike remains the most likely date for a hike at this time.

Subsectors within the financial and technology sectors continued to perform well. SPDR S&P Regional Banking (KRE) and iShares PHLX Semiconductor (SOXX) led the sectors for a second straight week.

Retail earnings season is almost complete and a string of positive results pushed XRT to its highest level since March, despite Wednesday’s mixed report from Target (TGT). The company beat analyst earnings forecasts by 9 percent and sales met expectations, but lower guidance by 5 percent on full-year earnings. Retail shares traded down in sympathy as TGT slid as much as 7 percent during the day.

Value outperformed last week as energy and financials were among the market leaders, extending a two-week trend.

SPDR Energy (XLE)
First Trust ISE-Revere Natural Gas (FCG)
Market Vectors Gold Miners (GDX)
Market Vectors Steel (SLX)
Market Vectors Coal (KOL)

There was a significant breakdown in gold mining shares over the past week. After a gain of more than 150 from low to high, a more significant correction is warranted.

Steel, copper and coal shares are trending sideways following a slowdown in China’s economy. Credit growth was below expectations in July and much of the growth that did occur was due to real estate-related lending. A crackdown on real estate is underway in several key cities, raising the risk of a further slowdown in August and beyond.

Fidelity Low-Priced Stock (FLPSX)

FLPSX’s all-time high is still more than 3 percent away, but last week’s move to a 52-week high completes the inverse head-and-shoulders pattern. The upside target from this pattern is $56 per share, a gain of 12 percent from current levels.

FLPSX

The three major benchmarks simultaneously closed at record highs for the first time since 1999 last week, buoyed by earnings beats and a large rebound in crude oil prices. While the Dow and the Standard & Poor’s (S&P) 500 pulled back slightly Friday, the Nasdaq hit another record with its seventh straight weekly gain. The bulls were alsooff to a good start on Monday in an effort to build on those advances.

Futures markets forecast a 12 percent chance for a rate hike in September and 38 percent in December, based on recent mixed reports. Several influential Fed officials are scheduled to speak this week and could influence these odds. Atlanta Fed President Dennis Lockhart will deliver prepared remarks on Tuesday, St. Louis Fed president James Bullard will speak on Wednesday and San Francisco Fed President John Williams will detail his economic outlook on Thursday. The most recent FOMC meeting minutes will be released Wednesday as well. The 10-year Treasury yield started the week at 1.5 percent, up from Brexit panic lows of 1.3 percent, but below the March high of 2.0 percent.

Key reports this week will include the consumer price index, July housing starts and industrial production, as well as weekly unemployment claims data. Homebuilder sentiment edged higher in August as the number of existing homes fell. Housing starts and building permits will be out on Tuesday. Economists forecast 1.180 million starts. Industrial Production and Capacity Utilization will be released Tuesday. Economists forecast 0.4 percent growth in production and a 75.6 percent utilization rate. Analysts predict July inflation was flat and core prices rose 0.2 percent.

Energy has experienced a sharp short-term rally from $39 to $45 per barrel on a short-squeeze, though the weekly oil inventory report is expected to reflect a drawdown and continued volatility is likely. The Bank of Japan (BoJ) could announce additional monetary policy action this week following weaker-than-expected GDP growth.

Although earnings season is winding to a close, a few important reports in the housing, retail, technology and manufacturing sectors are due out this week. Home Depot (HD) and Lowe’s (LOW) will announce quarterly earnings in addition to major retailers Target (TGT) and Wal-Mart (WMT). Cisco (CSCO), a major holding in many technology funds, will also report this week. Agriculture and construction manufacturer Deere & Company (DE) will close out the week before the opening bell Friday.

All three major large-cap indexes achieved new all-time highs over the past week.  The Dow climbed above 18,600 before settling back on Friday, while the S&P 500 cleared 2,185 and the Nasdaq topped 5,235.

While import prices increased more than expected, lower unemployment claims reinforced the consensus opinion in favor of labor market strength. The Job Openings and Labor Turnover Summary (JOLTS) report was strong as well. The Labor Market Conditions Index (LMCI), an aggregate of 19 labor market data points swung positive for the first time in 2016, providing an additional argument in favor of a rate hike, though one this year remains unlikely.

Wholesale inventories for June improved despite an unexpected drop in U.S. productivity. The housing market continued to strengthen as mortgage applications rose 7 percent. Former Chairman of the Federal Reserve Ben Bernanke believes the Fed will be reluctant to raise interest rates in the near future.

Several retailers beat expectations earnings expectations. Macy’s (M) announced a strategic plan to close stores and strong online sales lifted earnings. Kohl’s (KSS) gross margins improved on inventory management initiatives, while shares of Nordstrom’s (JWN) also rose almost 7 percent on better-than-expected earnings. Although luxury goods retailers Coach (COH) and Michael Kors (KRS) reported relatively flat earnings, shares of online retailer Alibaba (BABA) were up close to 8 percent as the company reported strong revenue growth. Disney (DIS) delivered earnings per share and revenues that were in line with expectations. SPDR S&P Retail (XRT) saw a modest 1 percent gain on the week.

Finally, oil was up on the week, but fundamentals still point to lower prices. Production cuts being discussed will come off of inflated production numbers, which effectively will allow the Saudis and Russians, among others, to increase production going forward. U.S. shale oil producers have become extremely efficient and are currently selling oil for less than $40 a barrel.  August is also a quiet period for the markets. The number of short positions grew when oil dipped to $39, but they have been squeezed by aggressive bulls taking advantage of illiquid markets.

SPDR S&P 500 (SPY)
SPDR DJIA (DIA)
iShares MSCI All Country World Index (ACWI)
Vanguard FTSE All-World ex-U.S. (VEU)
iShares MSCI Eurozone (EZU)
iShares MSCI Japan (EWJ)
iShares MSCI Emerging Markets (EEM)

ACWI and VEU are two global funds (one with U.S. exposure, one without) that have benefited from the rebound in European and Japanese shares and emerging markets.

The British FTSE 100 hit a new 52-week high as well, due to the weaker British pound, which has dipped back near its 52-week lows as the Bank of England steps up quantitative easing.

EEM danced around the $36 level for several weeks, but it finally broke out to $37 per share. There is some resistance ahead, but a rally into the low $40s is now probable as it re-enters its old trading range. The inverse head-and-shoulders pattern which formed from summer 2015 until summer 2016 is complete, and the target price is $42 per share.

The S&P 500 Index, Nasdaq and Russell 2000 made new highs this week, while the Dow Jones Industrial Average remained essentially flat.

As indexes achieve new highs it will be important to look at how broadly the gains are spread. First Trust Nasdaq 100 Equal Weighted (QQEW) has yet to exceed its 2015 high due to the disproportionate influence of large-cap names such as Apple (AAPL) and Microsoft (MSFT).

Fidelity Floating Rate High Income (FFRHX)
DoubleLine Core Fixed Income (DLFNX)
Thompson Bond (THOPX)
Fidelity Corporate Bond (FCBFX)
Fidelity High Income (SPHIX)

Treasury interest rates decreased last week, lifting many bonds. Investment-grade corporate bonds moved higher across the board, while high-yield led following a jump in oil prices.

Sector Performance

The better-than-expected July employment report triggered a slight shift in interest rate expectations, which boosted financials and suppressed utilities.

Subsectors within the financial and technology sectors were strong, with SPDR S&P Regional Banking (KRE) climbing more than 3 percent and iShares PHLX Semiconductor (SOXX) rising nearly 3 percent.

iShares Nasdaq Biotechnology (IBB) pulled back slightly, but remains above its trading range.

SPDR Energy (XLE)
First Trust ISE-Revere Natural Gas (FCG)
Market Vectors Gold Miners (GDX)
Market Vectors Steel (SLX)
Market Vectors Coal (KOL)

Oil prices rebounded to $43 a barrel in the past week, sparking a quick rally. Prices are moving lower again now and another test of $40 is on the way. Gasoline inventories fell over the past week, while crude oil inventories increased.

Steel, coal and gold-related shares all continued in their general uptrend. Chinese coal and steel futures rallied in response to the Chinese government’s plan to slow production in second half of the year.

Matthews India (MINDX)

India has been quietly reforming its economy the past couple of years and took a major step forward with the passage of a constitutional amendment which paves the way for a general sales tax (GST). This will eliminate a labyrinth of local taxes and create a common market in India, which until now has been relatively fractured by decentralization. While these reforms may have little short-term impact, the long-term outlook for the country has improved significantly.