Week Ahead: March 31, 2014

This week investors will be playing close attention to biotechnology, social media and other momentum leading sectors to see if the sell-off has ended. One bright spot was the Global X Social Media Index (SOCL), which bounced on Friday – right on schedule after hitting support. Guggenheim Solar (TAN) bounced as well.

The strongest sector coming into this week is energy. Oil prices rallied last week and carried the energy equities higher along with it. Fidelity Select Energy (FSENX) is near its post-2008 high and Energy Select SPDR (XLE) broke out to a new high last week. Oil service stocks are also breaking out. This could be bullish for the market and good news for the economy in general, since a rise in oil prices cannot be sustained in a weak economy.

It may also be a very early sign that inflation is picking up. As we noted a few weeks back, bank loans have increased in the wake of tapering and these financial institutions create the vast majority of money in the economy. If the pick-up in loans continues along with rising energy prices, we may soon see higher growth along with inflation, which would be very bullish for the commodity producers.

What may be underway in the market is a change in leadership. Based on the sectors moving up, this could indicate we are in the the middle stage of the bull market. During the period, but utilities begin to outperform, along with energy and materials. This is the period when interest rates start rising and growth hits its peak. This would also suggest momentum leaders such as biotech, Internet and solar rebound and move on to new highs, but that other sectors begin outperforming in the months ahead.

Economic Reports: Purchasing Managers’ Indexes for several nations are out this week. Construction spending in February, motor vehicle sales for March, factory orders for February and the trade deficit for February are all out this week, in addition to the unemployment number for March.

Earnings: A light week for earnings before the season kicks off with Alcoa (AA) next week.

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