Equities pulled back over the past week as the Nasdaq extended its outperformance. The Nasdaq’s relative strength was driven by a biotech rebound that finally began in late March. The all-time highs for the near-term S&P 500 and Dow are the important targets.
WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares British Pound (FXB)
CurrencyShares Canadian Dollar (FXC)
CurrencyShares Japanese Yen (FXY)
WisdomTree Emerging Market Currency (CEW)
The U.S. dollar is approaching the low end of its trading range. The key level to watch is 93 on the U.S. Dollar Index.
U.S. dollar weakness opposes euro and yen strength. Both currencies are strong despite the Bank of Japan and the European Central Bank taking extraordinary steps to boost their economy. In reaction to falling asset prices, the Bank of Japan has hinted it may further increase quantitative easing and purchase more assets at its next meeting.
In contrast, the emerging market and resource-related currency rallies appear to be running out of steam. Since these currencies are weighted much lower in the U.S. dollar indexes, they will not change the overall trend in the U.S. dollar. That said, the euro is unlikely to continue rising if these currencies see a meaningful pullback, and it is the largest component in U.S. dollar indexes.
Crude oil prices slid for the week into late Tuesday, when news of a large inventory draw hit the market. The API report showed a 4.3 million barrel decline in inventory versus expectations for a 3.2 million barrel build, or a 7.5 million barrel miss. This decline in U.S. crude oil inventory was confirmed by the DOE inventory report on Wednesday which showed a similarly large draw of 4.9 million barrels. Prices rebounded as a result and West Texas Intermediate Crude rallied past a key short-term level of $37.50 a barrel. If oil can hold above this level, the next target is $39 a barrel. A failure to hold these gains would be a strong sign that the oil correction is not finished.
Other commodities have pulled back led by copper, but steel continues to power higher. The steel sector is benefiting from protectionist policies all around the globe. In the past week, China retaliated with tariffs of its own on a class of steel it barely imports.
SPDR Utilities (XLU)
SPDR Pharmaceuticals (XPH)
SPDR Materials (XLB)
SPDR Consumer Staples (XLP)
SPDR Consumer Discretionary (XLY)
SPDR Healthcare (XLV)
SPDR Technology (XLK)
SPDR Financials (XLF)
SPDR Retail (XRT)
Healthcare was the only sector to gain ground in the past week, while energy and commodities led the decline in the broader market. Within healthcare, it was pharmaceuticals and biotechnology which powered the advance.
The second chart below reflects the relative performance of various healthcare ETFs since January 20. SPDR S&P 500 (SPY) is up about 10 percent. Medical devices and healthcare providers have trailed SPY, but only by a few percentage points. XLV saw almost no gain until late March, however, due to biotechnology and pharmaceuticals. In the past week this changed, with biotech and pharma gaining a lot of ground on the broader market.
IBB broke short-term resistance at $270 and the next resistance level is $290. Beyond that, the next target area is 2015 year-end levels, between $320 and $340. Before IBB were to hit those levels, we’d expect to see the S&P 500 Index trading at new all-time highs. Until that happens, the recovery in IBB may be limited.
Pharmaceuticals haven’t recovered as much as biotech have experienced due to individual cases such as Valeant (VRX) and now Allergan (AGN). The merger between Pfizer (PFE) and AGN is off following new Treasury Department rules, which sent shares of AGN down more than 10 percent on Tuesday. This drop wiped out the premium offered by Pfizer and also brought AGN’s return in line with the broader pharma sector. Moving forward, pharma should recover at a rate similar to biotech. The $43 and $45 levels are important for XPH, after which a recovery back to the $50s is possible.
IHI is also a fund worth keeping an eye on, as the medical device sector is on the verge of a new 52-week high. The sector has underperformed the healthcare sector in part because of the Affordable Care Act tax on medical devices. The short-term outlook for pharma and biotech is stronger because the funds have a lot more room for a recovery rally, but setting a new 52-week high is a sign of ongoing strength in medical devices. Healthcare in general, with funds such as XLV, will also do well if biotech and pharma turn positive.
Investment grade bonds keep pushing higher as interest rates decline, but high-yield bonds went sideways along with the energy market. Interest rates pulled back in the wake of Yellen’s comments last Tuesday and they kept moving lower until rebounding slightly today. A pullback in LQD is likely as soon as interest rates stop falling, as the small increase in the 10-year treasury yield today coincided with a small drop in LQD.
Gold is approaching both a short- and long-term fork in the road. The charts for GDX and GLD include the 14-day relative strength indicator. This indicates the relative strength has been slowly draining out of gold.
iShares MSCI Emerging Markets (EEM)
Emerging markets pulled back in the past week with oil prices. The rally in the Chinese yuan and other emerging market currencies also has been running out of steam. EEM is currently half-way between upside resistance of $36 and downside support at $31. Until it breaks one or the other, sideways trading is to be expected.