The Japanese yen’s rally is playing into market volatility. It’s possible the yen rally will reverse and that stocks are “right” as to the direction of the market, but the global market will dictate long-term outcomes.
The U.S. dollar remains in limbo with both USDU and UUP in trading ranges. The euro shows an inverse pattern. Eventually this trading range will break, though should the dollar remain in a bull market, odds are in favor of the dollar. The European Central Bank is expected to increase quantitative easing in March or further cut interest rates below zero.
The Canadian dollar is among the weakest developed-market currencies. The new government announced plans for much greater deficit spending and the Bank of Canada is considering negative interest rates.
Oil prices rallied on rumors of a Saudi-Russia agreement to freeze production with a provision that Iran stop production as well. Unsurprisingly, Iran’s refusal to co-operate has left the plan in the wind, bringing oil prices down 4 percent early in the week.
Both crude oil and energy producers are hitting resistance, but energy stocks are in an uptrend. The very short-term outlook is cautiously positive. Natural gas producers are at their lows and will be vulnerable to any further downside action.
Steel producers, coal and copper miners have all bounced strongly toward key resistance points.
iShares MSCI Emerging Markets (EEM)
We’ve been keeping an eye on the $31 level for some time and the break in early 2016 was a harbinger of lower prices, with a downside target around $26. A move above $31 would violate this outlook, but as long as EEM stays below $31, it will remain in effect.
Market Vectors Indonesia (IDX)
Indonesia remains one of the strongest emerging markets and continues in a short-term bullish pattern that, while somewhat dependent on EEM, should remain in effect if levels hold above $17.
Utilities snapped out of their losing streak last week and remain the strongest of the S&P 500 sectors in 2016. Consumer staples aren’t far behind, near their 52-week high. Consumer discretionary experienced a sharp rally in recent weeks as employment and income data were strong in January.
Internet stocks are trying to hold on to recent gains. There’s some support at $62 and resistance at $66. Due to the volatile nature of the shares, a test of either could occur in the next week to ten days.
High quality bonds continue to attract investment, while high-yield struggles under oil prices.
The 5-year Treasury yield is near the bottom of its nearly 3-year trading range.
Mid-caps are still relatively strong versus the broader market but small-caps are gaining ground. The Dow is still in a relative uptrend to the S&P 500 Index going back to August 2015, but its lead in 2016 has eroded. The Nasdaq has the potential to arrest its relative underperformance versus the S&P 500 if this week’s gains are sustained. Dividend shares have pulled back only slightly and remain a good choice for investors.
SPDR Retail (XRT)
Retail earnings season heats up this week. XRT rallied in spite of weak guidance from Wal-Mart (WMT) due in part to positive consumer data. Shares of Target (TGT) rallied strongly after missing earnings and revenues today, in response to positive guidance. XRT needs to climb above $44 to improve the near-term outlook. As a generally equal weight fund, no single holding has much influence on value. Groupon (GRPN), however, is one of only a few online retailers in the fund and currently the largest holding at 1.63 percent of assets. The fund has faltered since November 2015 but has rebounded after recent takeover talks.