Month: June 2017

The ratio of value to growth has signaled a possible shift over the past week, as illustrated in the comparison of iShares S&P 500 Value (IVE) to Growth (IVW).

Financial, industrial and healthcare shares advanced through the 2-day tech correction that pulled the Nasdaq 1.80 percent lower. SPDR Financials (XLF) gained 1.9 percent on June 9.

Further sector rotation or a larger pullback in technology is likely. At its peak this year, SPDR Technology (XLK) was up nearly 20 percent, and the iShares PHLX Semiconductor ETF (SOXX) had gained 26 percent. Financials and industrials will outperform tech at least until this pullback is complete. If a major sector rotation is underway, value sectors could assume market leadership for many months.

The Federal Reserve hiked interest rates as expected today, though slowing inflation data dampened the odds of another 2017 hike.

Before the Fed announcement, the 10-year Treasury yield broke to a new 2017 low following sluggish retail reports; sales growth ex-autos declined 0.3 percent in May and business inventories fell 0.2 percent in April.

The drop in long-term rates benefited corporate and investment-grade bonds. Both are at new 52-week highs.

General Electric (GE) shares rallied this week after CEO Jeff Immelt announced his resignation. GE has traded sideways over the past 18 months and is below its all-time high set in 2000. As a major component of the industrial sector, GE accounts for about 8 percent of passive funds such as SPDR Industrials (XLI).

Crude oil prices dipped below $45 a barrel on Wednesday after a build in gasoline inventory. Typically, gasoline inventory falls during the summer driving season, but it rose in 2016 and 2017 is playing out the same way. Oil production also remains high as shale costs keep dropping.

The U.S. dollar rallied after the Fed announcement, which included a plan to reduce its balance sheet by $10 billion a month starting later this year. The Fed will not sell assets, but instead forego the reinvestment of proceeds from maturing bonds. The Fed will also step up the amount by $10 billion every three months until it hits $50 billion. If the Fed starts this process in December 2017, then by December 2018 it will be reducing assets at a rate of $600 billion per-year.

With the Bank of Japan and European Central Bank still engaged in quantitative easing, the Fed’s plan is bullish for the U.S. dollar and bearish for gold. SPDR Gold Shares (GLD) sold off immediately after the Fed’s announcement.

A major sector rotation may be unfolding as value outshines growth for the first time this year. The technology sector has significantly outperformed the broader market throughout this year’s rally, led by large-caps Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL). On Friday, those so-called FAANG shares fell sharply, while many small-cap tech stocks continued to climb. Many believe the shares were simply overvalued and due for a correction, while other analysts are planning for a long-term shift into other areas.

Despite the tech rout, financials, industrials, materials, energy, and healthcare all advanced last week. Financials gained 1.9 percent on Friday, extending a strong multi-day rally. The industrial sector surged on Monday morning after General Electric (GE) CEO Jeff Immelt announced his resignation. GE shares jumped 4 percent.

April wholesale inventories declined 0.5 percent, shaving second-quarter GDP growth estimates. This week’s data could either debunk or corroborate slower-than-expected growth. Economists expect flat May producer and consumer prices, but anticipate a 0.2-percent rise in core consumer prices. Retail sales are expected to be flat, with sales ex-autos up 0.2 percent. Analysts believe April business inventories fell 0.2 percent and May industrial production rose 0.2 percent. Building and housing permits for May are both expected to rise from April’s totals. Finally, analysts forecast a slight uptick in the University of Michigan’s consumer sentiment survey.

In China, new loans, fixed-asset investment, and industrial production for May are all expected to reflect a small slowdown from April’s pace. Economists forecast European industrial production jumped 0.5 percent in May, but inflation fell 0.1 percent.

Last week, the 10-year Treasury yield briefly fell below 2.15 percent, a new low in 2017. A break of that low will embolden bond bulls this week. The U.S. Dollar Index bounced from 96.5 twice last week. Although energy stocks bounced sharply on Friday, crude oil prices started the week at $46 and change, only about $1 off last week’s low.

The Federal Reserve is widely expected to hike the Fed funds rate by 25 basis points, to 1.25 percent on Wednesday.
This week will be light on earnings.

H&R Block (HRB) is expected to report $3.51 per-share on Tuesday. Analysts are looking for $0.57 per-share from Kroger (KR).

The S&P 500 Index, Nasdaq and Dow Jones Industrial Average are all trading at new all-time highs.

Technology continues to pull the market higher, but subsectors such as semiconductors (SOXX) are likely to slow. SOXX has gained 17 percent since mid-April, an annualized pace of around 150 percent.

The healthcare sector hit a new all-time high over the past week. Biotechnology pushed the overall sector higher. Healthcare would look much stronger if IBB pushes above $300 per share to a new 52-week high. The medical device sector is at a new all-time high, and healthcare providers are on the verge of breaking their all-time high.

Consumer sectors have also been performing well. Both consumer staples and consumer discretionary are in record territory.

The bottom chart shows the price ratio of XLY to XLP in black and the 10-year Treasury yield in red. XLP has outperformed (falling black line) when the 10-year Treasury yield falls, and XLY when rates are rising.

XLY has been in a relative uptrend versus staples since March.

While technology, healthcare and consumer shares remain strong, energy remains weak. Oil prices tumbled $2 a barrel following a large increase in gasoline inventories. Oil services and exploration firms traded at new 52-week lows on Wednesday. If West Texas Intermediate crude oil closes below $45 a barrel, a test of the 52-week low set in August 2016 could follow.

The odds of a June Federal Reserve rate hike stood at 98 percent on Wednesday. Short-term interest rates are still in an uptrend.

The spread between the 10-year and 2-year Treasury yield fell to 0.84 percentage points, and is approaching the 2016 low.

The transportation sector remains in a trading range. iShares Transports (IYT) is rallying back towards its 52-week high, however. US Global Jets (JETS) also remains in a strong uptrend.

The relative performance of online retailers versus brick-and-mortar stores hit a new high on Wednesday. Macy’s (M) pulled retail lower on Tuesday after reporting gross margins could fall below forecasts.

Homebuilder shares continued rising in the past week.