ETF & Mutual Fund Watchlist for July 20, 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)

Strong earnings reports from key blue chip companies, such as J.P. Morgan (JPM) and Johnson & Johnson (JNJ), along with positive data, pushed major indexes to new all-time highs again last week. The Nasdaq and Russell 2000 are catching up now that the bull advance has resumed. The Russell 2000 price index has the farthest to go, with a gain of more than 8 percent needed to break the current all-time high.

Dividend funds continue to perform well, but a shift towards riskier assets has them lagging the broader market for now. Treasury bonds and investment-grade bonds both continued their July pullback. Given the strength of the prior advance, a further bond correction is probable.

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

Both FFRHX and THOPX have extended rallies in the face of higher interest rates and a brief pause for the high-yield debt market. In contrast, SPHIX has flat-lined since July 11 as the high-yield market digests the drop in oil prices. As reflected in the second chart of SPHIX oil prices and high-yield bonds traded in tandem for the past 18 months and have been correlated since the U.S. dollar bull market began two years ago. The correlation is likely to remain in effect for the near-term as oil producers are still at increased risk of default or bankruptcy. This creates considerable volatility for those energy-related high-yield bonds.

Sector Performance

Energy is weighing on value in July, offsetting the support from financials. With the growth sectors of the market starting to outperform value could continue to struggle relative to growth in the near-term. Both value and growth, however, are making new all-time highs.

Materials was the best performing sector for the second straight week, followed by financials, which benefited from strong earnings at J.P. Morgan (JPM), Morgan Stanley (MS) and Citigroup (C). The defensive utilities and consumer staples sectors were subdued by investors’ rising risk appetites.

Subsectors indicate a similar breakdown, though materials sector strength is rather narrowly focused in areas such as chemicals. Commodity sectors such as steel, precious metals, copper and coal all saw a pullback in recent days. Softbank’s buyout of chipmaker ARM Holdings bolstered the semiconductor sector. Although the stock is a small holding in iShares PHLX Semiconductor (SOXX), the surprise move could spur consolidation in the industry.

Healthcare is still working its way higher and remains in the same volatile pattern since bottoming in February. It’s likely the broader rally could break this pattern, but otherwise we may see another couple weeks of consolidation before healthcare pushes higher again. The outlier remains medical devices, which has frequently made new highs this year.

iShares MSCI Emerging Markets (EEM)

EEM and other emerging market funds remain attractive for risk tolerant investors at this time. An upside breakout is possible with an inverse head-and-shoulders completed, which has a price target of $44 per share. EEM is in limbo between $35 and $36; above $36 it will likely attract bullish traders, while below $35 the head-and-shoulders pattern will be at risk of failing. EEM is unlikely to rally by itself. A push higher would need to be accompanied by a weaker U.S. dollar and higher commodity prices, including oil.

Fidelity Puritan (FPURX)
Fidelity Low-Priced Stock (FLPSX)

FPURX broke out to a new all-time high this month. The $20.60 level is now support. FLPSX has yet to break out, having paused in the past week. It still needs to overcome $49.50, which is the nearest resistance point. After that is cleared, an advance towards the all-time high is likely.

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