Market Perspective for July 31, 2015

Interest rates were the most significant story of the week. The Federal Reserve adjusted the language in its policy statement suggesting the likelihood of a September rate hike. Specific shifts in comments include removing some equivocal language about the job market and adding a word that makes it sound as if labor improvements are starting to meet expectations:

The labor market continued to improve, with solid job gains and declining unemployment. On balance, a range of labor market indicators suggests that underutilization of labor resources has diminished.

Also, the Fed added the word “some” to this sentence:

The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The U.S. economy grew at 2.3 percent in the second quarter, in line with the prediction of the Atlanta Federal Reserve Bank, which forecasted 2.4 percent growth. Growth was solid in the quarter but the government also revised data from the previous year and quarter. The prior quarter was elevated, ticking up to 0.6 percent growth from a decline of 0.2 percent.  Last year’s data was revised lower to an average of 2.2 percent growth, making the post-2008 period the slowest economic expansion since World War II, followed by a next slowest expansion from 2001 to 2007, when the economy grew at an annualized rate of 2.7 percent.

Stable GDP growth and a positive outlook from the Federal Reserve sent U.S. stocks higher on the week. The S&P 500 Index closed Friday with a 1.19 percent gain, while the Dow was up 0.71 percent.  The Nasdaq rallied 0.78 percent and the Russell 2000 advanced 0.89 percent.

The U.S. Dollar Index traded higher on the week, while the Asian Dollar Index hit a new 5-year low. Talk of China devaluing the yuan increased, pushing the yuan lower. Thailand’s currency has been falling in July, while Malaysia and Indonesia’s currencies are at their lowest levels since the late 1990s. The weak wage growth reported on Friday reversed many of these weekly moves, but the longer-term trend remains in place.

Earnings were sound again this week. Amgen (AMGN) beat earnings and shares were up about 5 percent on Friday, lifting the biotech sector. Exxon (XOM) and Chevron (CVX) missed their earnings estimates and each fell about 4 percent on Friday.

ETF Watchlist for July 29, 2015

Today the Federal Reserve will put out its latest policy statement. The Fed funds futures market has been remarkably calm since mid-July and a hike by December is a certainty, the market is unsure if it will occur in September. The last comments by a Fed official, made by Federal Reserve Bank President Bullard, put a September hike at 50/50. There are basically three likely outcomes based on investor expectations that the Federal Reserve will telegraph a change at least one meeting early.

The dovish outcome: the Fed does not change its policy statement. A September rate hike will not occur and investors who have said the Fed won’t hike rates in 2015 will be emboldened. Stocks would likely rally on this news, interest rates would decline and the dollar would fall.

The neutral outcome: the Fed changes the policy statement to allow for a rate hike in September or any subsequent meeting.

The hawkish outcome: the Fed statement signals a September rate hike is coming, giving investors two months to adjust. This could also open the door to a second rate hike in December. Interest rates would rise, financials and the U.S. dollar should rally and commodities would likely drop.

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

West Texas Intermediate Crude fell below the $50 level last week. Oil prices are currently oversold and a bounce is likely if prices can firm.  The pace of the decline has started to slow in the past week, which is good news.

Equity investors tend to lead the energy market. They started selling energy stocks in May when oil prices stopped rising. The recent spike in energy could be the beginning of a rally, but it is important to remember a rally attempt failed earlier this month.





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

UUP has been in an uptrend since May, which continues to remain intact. On the downside, the $24.60 marks support and $25.60 is upside resistance. The Fed meeting this week could go a long way to determining whether the dollar tests its recent lows or breaks its two month highs.

The euro and yen have been relatively stable, even though Greek stocks remain weak and are a potential risk over the coming month. For now, attention is shifted away from Greece and has been focused on commodities and emerging markets.

Emerging market currencies were hit by news out of China last week. The government announced the yuan trading band will be widened soon. Each time the band has widened, the yuan has depreciated. The Australian and Canadian dollars both rebounded with commodity prices in recent days, however emerging market currencies kept falling due to China’s announcement.







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

High yield bonds were pressured by falling oil prices last week. HYG reached the important $87 level this week which marked its lows over the past year. The significance of this level is made clear by a price only chart of HYG, which removes all dividends and looks solely at the NAV of the bonds in the fund. This level also marked a bottom in 2012. Energy prices are the key; if they drop, investors will start to worry about the solvency of shale drillers.


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)

Utilities and consumer staples were the only two winners in a down week for the markets.

Healthcare care was the third largest loser due to a sell-off in biotechnology. The dip was a healthy one but didn’t push biotechnology below its lows for July. Biogen (BIIB) was responsible for the dip. Its shares fell more than 25 percent on disappointing earnings and drug pipeline news.

Financial ETFs pulled back as well ahead of the Fed meeting. A dovish statement could hurt financials but in all likelihood, investors have already priced in this possibility.

The transports have firmed up and may be turning but it wouldn’t take a lot to push IYT to new lows. Since it is in a bearish pattern since December, caution is still warranted.




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

Energy needs to bottom out or financials need to rally if value is going to end its downtrend.

Market Perspective for July 27, 2015

Domestic equities remain among the strongest in the world, but the coming days will likely see a pickup in volatility. U.S. equities have started the week lower, primarily due to a drop in the Chinese market which is weighing on commodities and foreign currencies. A Federal Reserve meeting this week may ultimately determine the market’s direction, as investors learn whether interest rates will be increased in September.

A plunge in the Chinese stock market is rattling global markets. The Chinese government hinted it may start lifting some of the extraordinary measures used to prop up the stock market in July; investors reacted by quickly dumping shares. The Shanghai Composite fell 8.5 percent, not far from the daily limit of 10 percent as investors who have ignored China’s slowing economy for the past few years are suddenly paying more attention to their troubles. Due to false data out of China, no one is sure how fast the economy is growing, but at best it is probably closer to 3 percent or 4 percent a year.

The main impact of the weak China story is felt in commodity markets. Major industrial commodities are at multi-year lows, including copper, iron ore, coal. Oil is at its 52-week low and is falling again at the start of the week. Commodity related currencies such as the Australian dollar and Canadian dollar are rebounding today following a recent drop, but they are also at multi-year lows, as are emerging market currencies.

This increase in volatility will continue through mid-week at a minimum with the Federal Open Market Committee meeting on Tuesday and Wednesday. If a September rate hike is coming, the Fed is likely to telegraph the move in Wednesday’s policy statement. Interest rates are moving lower in response to falling commodity prices, but U.S. economic data is getting stronger.  Last week’s jobless claims were at a 30 year low. This Thursday, the first estimate of second quarter GDP will be released. The Atlanta Fed GDP Now model forecasts 2.4 percent growth and the average of economist estimates is currently at 2.5 percent.

This is a big week for pharmaceutical and biotechnology earnings. Merck (MRK) and Pfizer (PFE) report, as does Amgen (AMGN) and Gilead Sciences (GILD). Amgen and Gilead are two of the few profitable biotech companies and their earnings make up a large chunk of the entire sector’s earnings. Other companies reporting this week include Ford Motor (F), United Parcel Service (UPS), Twitter (TWTR), DuPont (DD), Facebook (FB), MasterCard (MA) and Procter & Gamble (PG). Oil giants Exxon Mobil Corp (XOM) and Chevron (CVX) will also announce earnings. The main drag on S&P 500 earnings growth in the second quarter remains the energy sector, so these two firms will be closely watched.

Market Perspective for July 24, 2015

Technology earnings were mixed and falling jobless claims weren’t enough to push stocks higher this week. The Nasdaq saw a decline of 2.3 percent for the week, while the S&P 500 Index lost 2.2 percent. The Dow Jones Industrial Average fell 2.9 percent on the week and is now in negative territory for the year.

Jobless claims fell to 255,000 last week, the smallest number since 1973. The Federal Reserve has been most concerned about the job market in making the case for a possible delay in rate hikes, but this most recent data removes another potential hurdle. Currency markets reacted by sending the U.S. dollar higher and speculators have upped their odds of a September rate hike to 80 percent, with nearly 20 percent expecting a hike of 0.50 percent. At the start of the week, Federal Reserve Bank of St. Louis President James Bullard said a September rate hike was a 50/50 proposition. The Fed meets next week and if a rate hike is coming in September, the Fed is widely expected to open the door to a rate hike by changing the language of the policy statement.

Earnings reports were a mixed bag this week. Apple (AAPL) disappointed investors with its guidance for the current quarter and shares fell about 7 percent on the news. Since Apple is a major component of many indexes, the top holding in the S&P 500 Index and by far the top holding in the Nasdaq, it weighed heavily on the broader market. On Friday, Amazon (AMZN) jumped 10 percent, following in the footsteps of Internet firms Google (GOOG) and Netflix (NFLX). Amazon beat estimates and its fast growing web services division, which is more profitable than its retail business, saw revenues increase 81 percent versus last year. Starbucks (SBUX), AT&T (T), General Motors (GM), Southwest Airlines (LUV) and Verizon (VZ) were a few of the companies that also beat earnings estimates. Caterpillar (CAT) and International Business Machines (IBM) also disappointed and were the main reasons why the Dow underperformed this week.

Another big story was the plunge in commodity prices. West Texas Intermediate Crude crossed the $50 level and has fallen to $48.08. Energy funds fell to new 52-week lows due to the dip and gasoline prices have even started to nose down, despite it being the height of summer driving season. Gold generated headlines after it was walloped by a trader dumping 5 tons of the metal in a two-minute span in Shanghai trading on Monday. Industrial metals such as platinum and palladium have been faring worse in recent weeks, while copper broke to a new 5-year low. China’s economic slowdown coupled with increased production has created the conditions for another commodity market bust. This may be the start of the final capitulatory stage as long-term commodity bulls throw in the towel.

Bond yields dipped during the week even though the odds of an earlier rate hike are rising. The 10-year Treasury bond is still hovering near its high for the year at 2.26 percent. Investment grade corporates benefited from the dip in yield, but high-yield bonds were pressured by weakness in oil prices due to concerns about shale drillers.