Month: May 2015

Stocks continued to grind sideways with Greece’s issues looming over the market, but strong economic data points to a growing economy and rate hikes later this year.

The S&P 500 Index was down slightly heading into Friday trading in a week when the potential for a Greek default increased substantially. The country is facing several large payments to the IMF in June and there’s a question if it will be able to make the first payment next week. The euro fell versus the U.S. dollar during the week, but remained above its lows. The evidence from the financial markets shows investors have priced in a Greek default, which might even be viewed positively since it will force the ordeal to a final endgame. Whether positive or negative for the markets, however, investors often wait on the sidelines until the outcome of major events are clear. Stocks may continue to move sideways until the deadline for the IMF payment on June 6, assuming no deal is announced.

Looking forward over the coming months, the outlook for the economy and the equity market continues to improve. Housing data was very strong this week, with April pending home sales climbing to the highest level since the financial crisis. Economists were looking for a 1 percent increase, but they were way off as pending sales increased 14 percent. Recently, median home prices have also climbed to near the peak of the housing bubble, a sign that the economy may be finally returning to higher levels of growth. New homes sales in April were also higher than expected. Demographic trends are favorable here, as the larger Millennial generation moves into a period of family formation and home buying.

The second estimate of first quarter GDP was released on Friday and growth fell from 0.2 percent to negative 0.7 percent. While cold weather is often to blame, it wasn’t responsible for the weak first quarter. In fact, the first quarter result probably wasn’t as weak as reported. The government is using historical patterns of economic activity to seasonally adjust data and these methods are increasingly out of date. Revisions to past GDP, including first quarter 2015, is due in July. Second quarter GDP will be calculated using a new method. As for the current estimate of first quarter growth, the main reason for the decline was the higher than expected trade deficit in March, which subtracts from GDP.

Finally, the U.S. dollar hit a new multi-year high versus the yen this week. The breakout hasn’t been confirmed yet, but a push higher would be bullish for the dollar moving forward. A stronger dollar attracts capital to the United States and the domestic financial sector is the leader in global finance. The United States has the largest bond and equity markets, and many innovative companies around the globe choose to list on the U.S. stock exchanges. With automation picking up speed and rising wages causing companies such as even McDonald’s to begin replacing workers with robots, a major wave of capital investment could fuel a technology revival. The biotechnology sector is already in the middle of a boom, fueled by aging demographics, government spending on healthcare and breakthroughs in technology.

China has intentionally supported its stock market with the goal of reforming the economy and launching a wave of investment in technology companies, but the United States already has the most efficient capital markets in the world. A stronger U.S. dollar will draw more capital here, as it did in the 1990s.

PowerShares U.S. Dollar Index Bullish Fund (UUP)
CurrencyShares Euro Trust (FXE)
Global X FTSE Greece 20 (GREK)
CurrencyShares Japanese Yen (FXY)

Currencies will be the dominant factor in the market over the next week, if not for several weeks depending on how things shake out in Europe. Greece has all but said it will default on its IMF debt payment. It owes 310 million euros to the IMF on June 5. More payments to the IMF follow: on June 12, it owes 348 million euros; June 16 it must repay 581 million euros; and on June 19, must repay 348 million euros. On June 30, the bailout extension expires. If Greece cannot meet next week’s payment, a series of defaults are coming in the absence of a new bailout agreement. In July there is another large debt payment to the IMF, then the big repayment comes in August: 4 billion euros in Greek government bonds mature.

Investors are expressing their concern over Greece in the currency market, where the euro has slumped from $1.14 to $1.08. Both the euro and GREK are above their lows for the year, so “the market” doesn’t think Greece will actually default, or they believe a default to the IMF won’t be a major issue. Rumors of a deal on early Wednesday caused a small spike in the euro, oil, S&P 500 Index and 10-year Treasury yields. Expect the opposite if Greece does head for default.

From the perspective of the euro, it doesn’t yet signal a new leg up in the U.S. dollar bull market, but the view from the yen does. Yesterday, the yen broke below its 52-week low versus the U.S. dollar. Since the yen began weakening in 2012, it has experienced a series of rapid devaluations followed by a period of calm. The yen is a much smaller component of the U.S. Dollar Index, less than one-quarter the weight of the euro.

SPDR Energy (XLE)
FirstTrust ISE Revere Natural Gas (FCG)
Guggenheim Canadian Energy Income (ENY)
Market Vectors Russia (RSX)

Last week, we said oil prices appeared to be peaking, and that was indeed the case. Crude oil is a few dollars below levels hit in early May following an uptick in the U.S. dollar. Energy has been acting as a brake on the stock market in May and is one main reason why the index hasn’t pushed higher.

Guggenheim Solar (TAN)

Last week, Hanergy blew a hole in TAN’s valuation. Since then, the index provider has decided to kick the stock out of the index, but with Hanergy shares suspended, that can’t be done. Hanergy isn’t as important to the fund now, falling from 12 percent of assets to a current 6.28 percent, but it is still the fourth largest holding.

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)

Stocks headed lower over the last week, with almost all of the losses coming on Tuesday. Financials led the way down after long-term interest rates came off their recent highs.

Retail earnings season has been mixed, with Autozone (AZO) down this week and Tiffany’s (TIF) up sharply following their earnings report. Consumer discretionary remains in an uptrend though.

Biotechnology is slowing marching back to its all-time high. The sector may be tracing out a head-and-shoulders pattern, which would have a target price down around $310. For now, the most likely scenario is a push to new highs.

The real estate sector has been hardest hit by rising interest rates and it remains in a clear downtrend.

Banks are among the strongest stocks in the market now, thanks to the rally in interest rates and positive economic data that seems to be increasing the odds of a September rate hike.

SPDR S&P 500 Large Cap Value (SPYV)
SPDR S&P 500 Large Cap Growth (SPYG)

Value continue to struggle versus growth. Consumer cyclicals and technology have been among the better performers lately, while the energy sector is pulling value lower.

iShares MSCI Hong Kong (EWH)
Guggenheim Small Cap China (HAO)
iShares China Large Cap (FXI)
db X-Trackers China A Shares (ASHR)

The Shanghai and Shenzhen markets broke out to new 52-week highs last week, fueled by stimulus policies and ongoing reforms. Starting July 1, Chinese and Hong Kong mutual funds will be open to investors across borders. This could lead to another large inflow of capital, and investors are front-running the opening.

iShares DJ Transportation (IYT)

IYT broke out of its trading range yesterday, to the downside. The drop not only ends a six month trading range, but it broke the trend line that has served as support since the 2009 bottom. For the moment, this is one of the weakest parts of the market.

The dip in transports has followers of Dow Theory on the watch for further declines. The Transports and the Industrial Average tend to move in tandem and a divergence always resolves itself. The last significant divergence was in late 2012. Transports declined for the entire year, but when the broader market rebounded in November of that year, transports followed it higher. With stocks in a bull market, odds are transports will rebound, but technical traders are on alert in case divergence resolves with weakness in the Industrial Average.

SPDR S&P 500 (SPY)
iShares Russell 2000 (IWM)
S&P Midcap 400 (MDY)
SPDR DJIA (DIA)
PowerShares QQQ (QQQ)

Mid- and small-cap stocks are still keeping pace with the broader market, while the Dow Jones Industrial Average underperformed and the technology heavy Nasdaq is leading the markets higher. The strength of the financial sector is good news for the Russell 2000, which has 23.4 percent of assets in this sector. Fundamental support for small-cap leadership is building, but it may take a breakout to new highs by the indexes.

Greece is the top concern for the markets this week after the government said it may not pay the IMF without a new deal. Over the weekend, the ruling Syriza party voted internally on their policy and 45 percent of the delegation voted to default, return to the drachma, plus implement labor market reforms and pension cuts. There is rising fear within the party that the government will cave in to creditor demands for more austerity and privatization of assets. Some speculate that Syriza will default on the IMF loan in order to win over domestic support for a deal with creditors.

The euro/U.S. dollar exchange rate is the place to watch for updates on the Greek situation. For now, the dip to $1.09, down from $1.14 last Monday isn’t concerning. The euro fell steadily in 2014 and 2015 before bottoming slightly below $1.05 in March. As long as the euro holds above the low from March, the market is signaling Greece is not a concern. The Greece ETF, Global X FTSE Greece 20 (GREK) is also holding above its lows for the year.

This coming days will be relatively light for economic data. The biggest item is the second estimate of first quarter GDP growth. However, because the Bureau of Economic Analysis is set to revise historical data in July, the current number loses relevance. The forecast is for last quarter GDP to have fallen from the initial estimate of 0.2 percent growth, to negative 1.0 percent, with a rise in imports pulling the figure lower.

Durable goods orders released today fell 0.5 percent in April, although that is from March levels that were revised sharply higher. Stripping out transportation orders shows a negative trend though, with orders in their worst shape since the financial crisis. April new home sales increased and year to date, new home sales are up 23.7 percent over 2014. The median sale price also increased 8.3 percent over last year. The median price for existing homes is up 8.9 percent over last year and less than 2 percent away from exceeding the 2006 peak. The release of this news sent the U.S. dollar higher, as it lends more support to a Fed rate hike.

Earnings are light this week. Autozone (AZO), Costco (COST) and Abercrombie & Fitch (ANF) headline this week’s wave of retail reports. Homebuilder Toll Brothers (TOL) reports on Wednesday.

The Dow Transports broke support in early Tuesday trading, a potential signal that transportation stocks have more room to fall. Oil prices are holding steady and have been in a tight trading range this month, but a stronger U.S. dollar could tip the balance towards lower prices. Guggenheim Solar (TAN) may be one fund to keep an eye on. Last week, shares slumped 8 percent when top holding Hanergy saw its shares cut in half in only a few minutes of trading. The underlying index provider has booted Hanergy out of its index, but trading has been halted, preventing the liquidation of the position. Financials continue to outperform in May and with data supportive of interest rate increases, the sector has a tailwind to start this week.

Stocks reverted to form this week, with small- and mid-caps leading the market higher while the tech heavy Nasdaq outperformed the S&P 500 and Dow Jones Industrial Average. The Nasdaq traded at a new all-time high on Friday and the Dow hit a new all-time high earlier in the week.

A few days ago, the Federal Reserve released the minutes of the prior meeting and it seemed to eliminate the likelihood of a June rate hike. Officials remain concerned about economic growth and the tone of the meeting indicated rate hikes will occur when the economy is on better footing.

The week ended with some contrary data though. Core inflation increased 0.3 percent in April, a 3.6 percent annualized rate, and above the Fed’s target range and double the current annual core inflation rate of 1.8 percent. Rising medical costs helped drive the number higher. One reason why we’ve favored the healthcare sector in recent years is the government’s policy changes, such as the Affordable Care Act, were designed in such a way as to generate cost increases. With increased spending on healthcare, raising premiums and extending coverage to more people, the government’s policies increased demand without raising supply. As we know from economics 101, when demand rises and supply is the same, prices increase.

This could impact Federal Reserve policy because healthcare is a large sector in the U.S. economy and the inflation rate in medical services is picking up speed: the increase in medical costs in April was the largest since 2007 and second largest since the mid-1990s. On Thursday, The Wall Street Journal reported insurers in several states are looking to raise insurance premiums by 30 to 50 percent next year. The reason for the requested premium hikes are due to more people gaining coverage, with the end result being higher healthcare spending in 2016, and a good reason to remain overweight healthcare moving forward.

Another large sector of the economy seeing rising prices is housing. Rent climbed 3.5 percent year on year. Similar to healthcare, prices in this sector tend to be sticky and do not often drop. If a trend to higher prices develops, it is very hard to reverse, which is why the Fed focuses on the core inflation number. Headline inflation, which includes food and energy, fell 0.2 percent because of low oil prices. Headline inflation can continue to fall into the end of the year or at least remain low if oil prices stay around $60 a barrel as it was only in December 2015 that oil first fell below $60. This gives the Federal Reserve time to delay rate hikes, but if core inflation remains elevated, the inflation hawks at the Fed will start making more noise.  A pickup in the economy will also argue for a rate increase. This past week, housing data was positive, with housing starts and building permits in April well above forecasts. The flash PMI for May was down slightly from April, but still in expansion territory.

Long-term interest rates rose and then fell over the past few days, but remain near the highs reached a week earlier. The Federal Reserve does not control long-term interest rates and while the April core number is elevated, it will take several months of persistently high core inflation to change investor expectations. Since things can easily change in a few months’ time, investors should hold off overly betting on rising interest rates, but they should start planning for it and know which funds and strategies are best for their portfolio. Should core inflation remain high through the summer, a September rate hike could become a strong possibility.

Rate hikes aren’t a fait accompli though. One factor working against inflation is the strong U.S. dollar, which keeps a lid on commodity and import prices. The dollar has pulled back from its highs set earlier this year, but the move thus far looks like a correction and not a reversal of the bull market. Greece is likely to be resolved by June, which will significantly impact the euro. Since the euro is the largest component of the U.S. Dollar Index, 57.6 percent, it is the most important currency in determining the direction of the dollar. The yen is the second largest at 13.6 percent of the index. On Friday, the yen was hovering near its 52-week lows versus the greenback.