ETF & Mutual Fund Watchlist for August 3, 2016

SPDR S&P 500 (SPY)
iShares Core High Dividend (HDV)
Vanguard Dividend Appreciation (VIG)
Vanguard High Dividend Yield (VYM)
iShares MSCI Edge Minimum Volatility USA (USMV)
iShares 20+ Year Treasury (TLT)
iShares iBoxx $ Investment Grade Bonds (LQD)

August tends to reflect low trading volume, which could potentially lead to less liquidity in the market and increased volatility, as it did last year. Thus far, however, the market remains relatively calm. Most equities spent a third week in a holding pattern following new highs, though the Nasdaq pushed higher on strong earnings reports from Alphabet (GOOG), Apple (AAPL) and Amazon (AMZN).

Many shale oil producers funded expansion with high-yield debt, growing the energy sector’s share of the high-yield debt market and high-yield index funds. When oil prices tumbled, investors repriced these energy bonds, dragging down the broader indexes. When oil began its plunge from $100 a barrel to below $30, default levels were under continuous revision. Today, investors don’t see much trouble above $40 a barrel, hence the divergence between oil prices and high-yield debt. If oil continues to slide into the $30s, however, it is likely to experience a pullback.

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

Unlike stocks, bonds are seeing some movement. FFRHX and THOPX, bond funds that aim at higher yielding credit continue to push higher. In contrast, corporate, investment-grade and pure high-yield bond funds traded lower. The divergence in high-yield and oil should be closely monitored this month.

Sector Performance

The calm market benefited consumer staples and utilities last week, which ended a period of underperformance, while energy and materials were hit by the pullback in oil prices.

Healthcare subsectors also performed well. Biotechnology continues to rebound; in the past weeks, IBB and XBI broke out of its sideways trading range. Biotech now has a clear path ahead and could rally as much as 10 percent before meeting resistance again. FSPHX broke out in a similar manner as biotechnology, as reflected in the chart above. As biotech rallies and medical devices continue to achieve new all-time highs, the sector is well positioned for leadership in the last third of the year.

The Nasdaq fueled the outperformance of growth shares. Energy also weighed on value, as did financials following the slide in interest rates from late June to early July. Nevertheless, value remains in a relative uptrend since taking the lead in late January.

Housing faded after making a new post-2006 high a week ago, but still trades higher than it has for most of the past year. There is no major housing data in the next week.

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

The wide gap between oil, natural gas and energy equities has closed, as illustrated in the YTD performance charts.  The extremely volatile natural gas price is still a bit of an outlier, but crude oil, XLE and FCG are all within 4 percentage points in 2016.

Gasoline inventories remain the chief concern for the oil market. Saudi Arabia slashed oil prices for Asian customers over the weekend, pulling West Texas Intermediate Crude to a $39 handle before a small rebound on Wednesday.

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