Market Perspective for March 30, 2015

Bears will try to break key support levels over this holiday shortened week. Over the past several days, a number of sectors and indexes bounced off support levels, including biotechnology and the S&P 500 Index which hit their 50-day moving averages. Additionally, the Dow Transports hit its 200-day moving average. Bulls are winning in early Monday trading though, with gains in Asia and Europe carrying over to the U.S. market. Investors are optimistic that more central banks, including China, will ease policy to boost economic growth. These expectations have pushing the U.S. dollar higher as well today.

Oil prices continue to confound both the bulls and bears. Following last week’s rally above $50 a barrel, oil has since slumped back into the $40s. The move higher came in the wake of Saudi Arabia’s air strikes against Yemen. Since then, other Arab nations such as Egypt have pledged support for Saudi Arabia and calm has returned to the oil market. Also putting pressure on prices is a potential nuclear deal with Iran. Some analysts estimate Iranian oil exports could rise by 1 million barrels per day if sanctions are lifted and the world market already has a surplus of approximately 1 to 2 million barrels per day.  There’s also speculation that Iran has been storing excess oil production in anticipation of sanctions being eased.

The Nasdaq and Russell 2000 will battle it out for best performing domestic index as the first quarter concludes on Tuesday. Through Friday, the Nasdaq was up 3.28 percent and the Russell 2000 was up 2.96 percent. Meanwhile, the S&P 500 Index has only gained 0.10 percent. The worst performing indexes remain the Dow Utilities and Dow Transports, down 6.08 percent and 4.81 percent, respectively. Biotechs have lifted the healthcare sector (XLV) to a 7.11 percent return. Consumer cyclicals (XLY) were the next strongest sector among S&P 500 sectors, up 4.17 percent. Homebuilders (XHB) have gained 6.22 percent.

European markets benefited from quantitative easing during the first quarter. Germany, Portugal, Italy and Ireland’s stock markets have all gained more than 20 percent this year. Among commodities, only gold and silver are up, most likely due to Europe’s easing policy. The U.S. dollar was the best performing currency; it had gained more than 7 percent this year as of this past Friday.

There’s no shortage of economic data coming out this week. This morning, the Bureau of Economic Analysis released the personal spending figures for February. Expectations were for a 0.3 percent increase, but it came in higher at 0.4 percent. Spending was below expectations, pushing up the personal savings rate to 5.8 percent, the highest it has been since 2012. Stronger income growth will increase expectations of a rate hike by the Federal Reserve, given the Fed’s focus on jobs and wages.

Later in the week, the Chicago PMI, consumer confidence and Markit PMI will be released, plus important data relating to construction spending, trade deficit and factory orders in February. On Friday, the unemployment rate for March will be announced. Overseas, China’s PMI and Eurozone inflation will also be closely watched.

This coming days will be light on earnings ahead of the big kickoff to first quarter earnings season next week. Monsanto (MON) and Micron Technology (MU) are the significant reports this week.

Market Perspective for March 27, 2015

Equities slipped this week as leading sectors saw a quick sell-off. The drop landed squarely on the Nasdaq, which fell more than 3 percent. The other major indexes are down a little over 2 percent. The Dow Jones Transportation Average slumped 5 percent after railroad Kansas Southern (KSU) said the drop in oil prices will impact revenues. From a sector perspective, biotechnology, pharmaceuticals and semiconductors and lost the most ground. However, biotechnology and pharmaceuticals both experienced a modest rally today.

Coming into this week, biotechnology was up more than 20 percent. Following this week’s drop, biotechnology is still up double digits, while the S&P 500 Index will need to rally on Friday to stay positive for the year. It would not be surprising to see a further drop in biotechnology given the run-up, but the sector did bounce off its 50-day moving average, as it did twice before in the past four months. Additionally, small- and mid-cap stocks continue to lead the market. As long as small-caps are doing well, a deeper correction appears unlikely.

Oil prices rallied sharply after Saudi Arabia launched air strikes on Yemen in an effort to defeat Iranian supported forces. Yemen is not a key oil producer, but it shares a long border with Saudi Arabia, whereby creating an unstable situation. Yemen’s president has fled the country and there are now four ground armies operating in the country: Yemeni government forces still control most of the east, Iranian-backed Houthis control the West, Al-Qaeda forces which control parts of the north and south, and the politically motivated Southern Movement that controls two smaller areas.

Geopolitical factors often impact the energy market, but are typically short lived. Oil prices are already coming down on Friday as fundamentals again take precedence. Inventory continues to rise around the world and unless fundamental demand increases or supply drops, oil prices will remain depressed.

Domestically, the final estimate of fourth quarter GDP growth was revealed to be 2.2 percent, unchanged from the second estimate. There were some changes, with inventories moving from positive to negative and personal consumption climbing from 4.2 percent growth to 4.4 percent. The impact of the Affordable Care Act can be seen in those consumption numbers and helps explain why retail sales have been weaker than anticipated. Lower gas prices were expected to translate into stronger retail sales, but it turns out consumers are spending more on healthcare premiums. This also helps explain why biotechnology and pharmaceuticals have performed strongly this year.

Markit released the flash PMI for March this week. It ticked up slightly from February’s level, with new orders and job creation rising.  Manufacturing is a leading indicator for the economy and its strength in March points to higher economic growth over the next quarter. New homes sales were also up strongly in February and well above estimates as forecasters had expected the weather to weigh on sales. Inflation was also positive in February, up 0.2 percent. Real time data shows inflation is still increasing in March, which also suggests the economy is heating up as we close out the quarter.

ETF Watchlist for March 25, 2015

PowerShares U.S. Dollar Index Bullish Fund (UUP)
CurrencyShares Euro Trust (FXE)
CurrencyShares Japanese Yen (FXY)
WisdomTree Dreyfus Emerging Currency (CEW)

The Federal Reserve’s dovish comments last week pushed back rate hike expectations. Speculators closed their dollar long positions and covered their foreign currency shorts, resulting in a sharp reversal across the currency markets. The largest rebound occurred in emerging market currencies, where even the Chinese yuan rallied sharply despite being a relatively strong currency over the past year. The euro rebound was meaningful, but it has not yet broken out of its long-term downtrend. The bounce in the yen is the smallest of all. FXY has been in a trading range between $80 and $83 since December. A broad reversal in the U.S. dollar is unlikely unless FXY climbs above $83.




SPDR Energy (XLE)
FirstTrust ISE Revere Natural Gas (FCG)
Guggenheim Canadian Energy Income (ENY)

Oil prices rebounded along with foreign currencies, but the bounce has been muted by the continued climb in inventory and steady production. In the U.S., the American Petroleum Institute reported inventory growth of 4.8 million barrels last week. That’s down from the prior week’s increase of more than 10 million, but the pace of increase is still historically high. Even though rig counts are falling, the most productive rigs are still operating and it’s even possible that U.S. production will rise thanks to tax cuts in North Dakota that were triggered by low prices.

In China, low prices led to massive oil imports that filled existing strategic petroleum reserves. Construction of the reserve continues, but it may be several months before more inventory space is available, potentially ending the surge in Chinese imports. China may have also run out of space in January, since oil imports fell that month, and prices tumbled globally as a result.

Finally, the Saudis say they will not cut production unless non-OPEC countries do the same. However, Russia is in no condition to cut exports and the U.S. has almost no control over oil production in the short-term.
2016.

Investors in equities remain more bullish than commodities traders as both XLE and FCG have maintained their uptrends. However, optimism at this point isn’t high for the sector, providing upside potential for aggressive investors.





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)

A number of equities rallied in the wake of the Fed’s policy statement, but the comments on the economy dinged the financial sector. Bank stocks climbed ahead of the Fed statement because higher interest rates are good news for banks who can lend at higher rates. In contrast to financials, the rate sensitive utilities sector rebounded after sliding ahead of the Fed’s meeting.

Year to date, healthcare is the best performing sector, with consumer cyclicals close behind. These two are largely responsible for the gains in the broader market indexes this year.



SPDR S&P 500 (SPY)
iShares Russell 2000 (IWM)
S&P Midcap 400 (MDY)
PowerShares QQQ (QQQ)
SPDR DJIA (DIA)
SPDR S&P 500 Large Cap Value (SPYV)
SPDR S&P 500 Large Cap Growth (SPYG)

Small-caps continue to lead the market in 2015 which is a bullish sign for stocks. One explanation for small-cap strength is the strong U.S. dollar, but last week the dollar dropped and small caps continued to lead the market. Mid-caps continue to lead large caps as well.

The technology and biotech heavy Nasdaq is starting to lose some steam relative to the S&P 500 Index. Technology lost ground in March and while biotech has been strong, it doesn’t carry enough weight in the index to drive performance. Relative performance since late August has been weak and it would not be surprising to see a change of leadership over the coming weeks and months as the market digests the possibility of higher interest rates.





iShares Transportation Average (IYT)

IYT tumbled last week after Kansas Southern (KSU) said its earnings would be hit by falling oil prices. Transportation stocks often trend with oil prices because demand for transportation rises with economic activity. The drop in oil prices to date has not coincided with a plunge in economic activity, but IYT has traded sideways since oil prices began tumbling in November. Resistance is at $165 and a move above that level would be bullish. To the downside, a break of the $155 level would start a bearish move to below $150.

Guggenheim Solar (TAN)

Solar stocks have been on a tear since January, but a correction should begin over the coming days. Solar stocks are one of the riskiest market sectors. When spirits are running strong, solar stocks catch a bid and climb, and when investors turn cautious, solar stocks are dumped. Another asset that rises and falls with sentiment is bonds, with yields rising as investors turn more optimistic. Solar rallied along with interest rates since January, but over the past few weeks, a gap between interest rates and solar stocks has opened. Odds are solar stocks will take a breather following a nearly two-month uninterrupted rally.

iShares iBoxx Investment Grade Corporate Bond (LQD)
iShares iBoxx High Yield Corporate Bond (HYG)

Finally, there hasn’t been shift in the trend between high yield and investment grade corporate bonds. Both HYG and LQD rallied thanks to falling interest rates.

Market Perspective for March 23, 2015

The Russell 2000 looks to extend its march into record territory this week after breaking out to a new all-time high. The Nasdaq will also try to break its all-time high. The S&P 500 and Dow Jones Industrial Average are just below their highs, with only a small gain needed to push them back into record territory.

Although new highs are likely and certainly positive news, U.S. stocks won’t be the most watched assets this week. Instead, oil, the U.S. dollar, euro, yen and treasury bonds will take center stage as traders look for last week’s post-Fed rally in oversold markets to continue. Oil remains the weakest of the pack. On Monday, a Saudi official said production remains high and they will not cut production until non-OPEC countries do so. With Russia desperately needing oil exports to support GDP and U.S. shale producers holding steady, the two biggest non-OPEC suppliers aren’t cooperating just yet.

The euro is the most likely asset to rebound given how many speculators have bet against it. However, a report by The Wall Street Journal this morning, Torrent of Cash Exits Eurozone, explains that many large investors have been selling euro assets due to the extremely low yields. In many countries, bond yields are negative out to 7 years (Germany) or 10 years (Switzerland). Three central banks, including Switzerland, Sweden and Denmark, have cut interest rates below zero in order to deter foreigners from buying their currencies. A rebound in the euro is very likely to occur in the short-term, but if assets keep flowing out of Europe, the long-term trend of a weaker euro will eventually reassert itself.

In the U.S. stock market, biotechnology performed well last week, with a successful drug trial at Biogen (BIIB) boosting the sector. However, BIIB was just downgraded by Stifel, sending the stock lower. Fellow biotech giant Gilead (GILD) reported some patients have fallen ill, and one died, from taking its hepatitis C drug. This has resulted in biotech sector funds losing a little over 1 percent in early Monday trading. Moving higher in Monday trading were energy, materials, consumer staples and consumer cyclicals. Home builders also advanced on the positive existing home sale data, but new home sale data out tomorrow will have a bigger impact.

Several important pieces of economic data will be released over the coming days. Today, existing home sales for February were reported and were in line with expectations. Tuesday, the consumer price index for February will be reported, including the core CPI. Based on up to date inflation data we track, these numbers could come in a little higher than expected. Also on Tuesday, the Markit flash PMI for March will be out. The economy has been weak during the first quarter and the flash PMI will tell us whether this trend is still in effect, or whether economic activity has started picking up. Durable goods orders for February are out on Wednesday; not a key number, but it will also provide more information on first quarter GDP. On Friday, the government reports the third and final estimate of fourth quarter 2014 GDP growth. Analysts expect an increase to 2.4 percent growth.  Also on tap this week is the flash PMI for China on Wednesday and Japanese inflation numbers on Thursday.

Companies reporting earnings this week include Paychex (PAYX), Yingli (YGE), Lululemon (LULU) and Blackberry (BBRY).