ETF Watchlist for September 30, 2015

iShares MSCI Emerging Markets (EEM)

Numerous charts look similar these days, with many at multi-year lows or highs. Those at new lows, such as copper, are already in a bear market. One chart that has thus far refused to give in to new lows, and could help commodities and related assets over the weeks and months ahead, is emerging markets.

Emerging markets are currently at the bottom of its 5-year trading range. Nearly every six months, emerging markets have gone through a bull-bear cycle of rising and falling within this range, but are now back to 2011 support. A bounce would indicate current fears are overblown and emerging markets may be headed for a larger rally.

If this level is broken, it opens up the 2008 lows. Given what is going on in commodities, China, emerging markets and the strong U.S. dollar, current problems bear a strong resemblance to the 1997 Asian Crisis. Back then, Thailand set off a chain of currency devaluations, though China held firm and defended the yuan. This time however, China is at the center of the problem.

The big risk is China’s foreign exchange reserves are not large enough to defend its currency against a run on the yuan. Even though they have about $3.5 trillion in total reserves, some economists estimate China may only have a few hundred billion that is liquid reserves and it is already spending at a rate of $50 to $100 billion a month to defend the yuan.

At present, investors are generally cautious and pricing further risk into high-yield, commodities and emerging markets. The fuel for a strong bull rally is due to extreme bearish sentiment. Whether we see a strong rebound in October, or another leg down, it will likely be foretold by the direction EEM moves over the days ahead.


WisdomTree Chinese Yuan (CYB)
WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares Japanese Yen (FXY)
CurrencyShares Australian Dollar (FXA)
CurrencyShares Canadian Dollar (FXC)
WisdomTree Emerging Market Currency (CEW)
WisdomTree Commodity Currency (CCX)
PowerShares DB U.S. Dollar Bullish Index (UUP)

China has been raising the value of the yuan by buying it in Hong Kong, leading to spikes in the interest rates for interbank loans. Today, the government announced new rules on overseas cash withdrawals from UnionPay credit cards, limiting Chinese to 50,000 yuan worth of withdrawals for the rest of 2015, less than $7900 before fees. For all of 2016, the limit is 100,000 yuan as the government tries to stem the outflow of capital.

Although the yuan has stabilized, the emerging market currency fund CEW has broken to new lows, as has CCX. This week, India cut interest rates as its economy is also beginning to slow. India is not a commodities exporter, but the wider slowdown in the region is taking a toll.

The euro and yen have held steady. However, on Wednesday we saw the eurozone’s inflation rate slipped back into deflation this month. This follows a negative inflation report in Japan. Although nothing has been announced, investors expect both countries will expand quantitative easing.

The Canadian dollar also broke to new lows, while the Australian dollar is more closely tracking with the yuan.









SPDR Energy (XLE)
FirstTrust ISE Revere Natural Gas (FCG)
Global X Copper Miners (COPX)
Market Vectors Coal (KOL)
Market Vectors Steel (SLX)

Oil prices have been holding steady in the mid-$40 range, although weakness in the stock market has brought energy stocks near their 52-week lows.

Copper is in worse shape, despite a spike on Wednesday keeping it from closing the quarter at another new 52-week low. Part of the reason for the drop has been the bankruptcy concerns surrounding major commodities firm Glencore. Traders are pushing up the price of insuring against a credit default. The trend in these assets remains bearish and new lows are likely in the weeks ahead.







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)

It was a rough week for equities, so it is no surprise to see utilities as the only sector in the black. Healthcare was the biggest loser due to losses in the biotechnology sector.

The transportation sector has been solid. It fell over the past week, but remains off its late August lows. For much of this year, transportation stocks were weaker than the broader market and this is a small hopeful sign that there is reason for optimism. That said, shares of IYT would need to crack $145 in order for the short-term technical picture to turn bullish.

A dip in the 10-year yield helped real estate. Nevertheless, the downtrend that began in January is still firmly in place.

Biotechnology is at the center of attention after it plummeted over the past two weeks. This volatile sector is prone to sell-offs and concerns over drug pricing was the same impetus for a similar plunge in the spring of 2014. At that time three members of Congress raised an issue with the price of Gilead’s (GILD) hepatitis C drug. Last week, a small drug company which hiked the price of a drug from $13.50 to $750 per pill, before lowering the price amid a storm of criticism. Other firms are under fire for smaller price hikes.

These periodic sell-offs should not be surprising. Biotech companies rely on a few successful drugs to fund their operations. If the government threatens to step in and restrict pricing, the industry would be a far less attractive area for investment. Since it is election season, there could be more criticisms coming over the months ahead. In the end, very little is likely to be done because the biotechnology industry is an American success story.

Regional bank stocks continue to beat their larger bank counterparts. This trend has been sharp, with no corrections over the past month. Relative performance has been in a basing pattern since 2012. If regional banks add another 2 percent of outperformance, it could signal a significant relative performance breakout.

The impressive rally in housing stocks has been hampered by the Federal Reserve’s decision to leave interest rates unchanged. Since that decision, it has been almost non-stop losses for home builders. ITB is now at important support levels. Shares could find support at $25 or $24, but if they drop, the shares could slide into the low $20 range.






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

HYG broke its 52-week low this week as concerns about commodities weighed on the high-yield sector. The second chart of HYG is the unadjusted figure, essentially showing the value of the bonds in the portfolio over time. This chart clearly shows high-yield is at its weakest point since a small panic in 2011.



Market Perspective for September 28, 2015

The S&P 500 Index closed 3.2 percent above its August low on Friday and 3.6 percent away from the 2000-point level, an important point for technical traders. Falling commodity prices have worked in favor of the bears today. Copper is headed for a test of its lows and stock of commodities giant, Glencore, is down nearly 25 percent in Monday trading. Shares of the firm have declined about 75 percent since May as investors question Glencore’s ability to repay its debt.

It will be an important week for economic data. This morning the government reported a rise in personal income by 0.3 percent in August, a healthy pace that will shift investor expectations back towards a rate hike. Consumer price inflation was low at 0.3 percent, but core inflation is up 1.3 percent over last year. Given what’s happened in the oil market, that core inflation number should raise concerns for some of the inflation hawks at the Federal Reserve.

Manufacturing PMI numbers will be out later this week, with China’s being closely watched. Last week the flash PMI for China showed the manufacturing sector at its weakest since the financial crisis. Domestically, construction spending for August and motor vehicle sales are scheduled to be released on Thursday. On Friday the unemployment rate for September will be announced.

We’re still several weeks away from the kickoff of earnings season, but a few firms will report over the coming days. Costco (COST) is the headliner, along with Paychex (PAYX) and Micron Technology (MU). Consumer stocks have been doing well in recent weeks and Friday’s earnings beat by Nike (NKE) gave the sector another reason to be optimistic. We’ll see if Costco can continue the trend.

Shares of Micron Technology have tumbled continuously in 2015, losing about 60 percent from their December 2014 high. The semiconductor sector has been losing ground since peaking in June. The Philadelphia Stock Exchange’s Semiconductor Index, known as the SOX, is down 20 percent since then. The technology sector lost momentum in recent weeks due in large part to weakness in this sub-sector. Industry giant Intel (INTC) had been holding steady since July, but Qualcomm (QCOM) is trading at a new 52-week low on today.

The currency market, specifically the U.S. dollar and emerging market currencies, demands the spotlight this week. The U.S. Dollar Index is off its highs this year, but the index is heavily weighted towards the euro. Trade weighted U.S. dollar indexes and those with bearish exposure to emerging market currencies are trading at or near record highs. WisdomTree Bloomberg U.S. Dollar Bullish (USDU) is 1 percent away from its 2015 high. It has been hovering near these levels for several months and a move to the upside would be a significant bullish breakout.

Market Perspective for September 25, 2015

The major indexes have experienced small losses on the week, nearly all of which came amid selling on Tuesday. There were a few key news stories that explicate the sell-off.

Early in the week startup company Turing Pharmaceutical announced a massive price hike (from $13.50 per pill to $750, more than 5000 percent) for its recently purchased rights to the 62-year old drug Daraprim, an antiparasitic compound used primarily to prevent malaria and treat toxoplasmosis and other infections in immunosuppressed individuals. This drew widespread public criticism as well as harsh comments from presidential candidate Hillary Clinton, sending a ripple through the biotechnology sector.  Some are apprehensive that a Clinton government could result in tighter restrictions on drug pricing. While the broad stock market is down slightly on the week, SPDR Biotechnology (XBI) has lost nearly 11 percent over the past few days, perhaps due to Clinton’s comments reviving fears of government control.  If firms were to fall prey to these fears, investors could choose to put their capital in other less politically contentious sectors.

It is important for investors to remember that so-called “predatory” pricing is a fairly common occurrence in pharmaceuticals and generally results in little, if any long-term impact on the sector.  Daraprim is used by only 2,000 Americans per year, making it especially vulnerable to hikes.  We have seen this with other antiparasitics in recent years; when demand is extremely low competitors have no interest in creating a similar or “generic” drug and the price remains high or hikes to justify its production.  When mergers in 2003 dropped the number of manufacturers of the heart medicine digoxin from eight to three, its price rose 600 percent.

We have seen this political effect before as well.  In 2014 Representative Harry Waxman sent a letter to the CEO of Gilead (GILD) Sciences questioning the high price of the Hepatitis C drug Sovaldi.  The treatment would cost over $80,000 but had a cure rate in excess of 90 percent.  The stock dropped sharply after the announcement of the letter as investors feared government intervention.  The stock rebounded after the dust settled.  Statements by politicians can make headlines but ultimately, the fundamentals of a company will dictate its stock price.  We expect the same thing to occur now; once the current news cycle concludes, the biotechnology sector should rebound.

Caterpillar (CAT) dragged on the materials and industrial sectors. The company has seen weak sales for nearly three years running, but when the company announced layoffs on Thursday, it triggered more selling. Although CAT is a Dow component, it is the best performing index on the week thanks to strong earnings from Nike (NKE) and Janet Yellen’s speech on Thursday.

Shares of Nike rose to an all-time high on Friday, with a gain of nearly 9 percent. The company saw earnings rise 23 percent last quarter and beat analysts’ average estimate by 15 percent. Janet Yellen’s speech on Thursday revived hopes of a rate hike, sending financials higher on Friday. Speculators only give a December rate hike 35 percent odds though, down from 50 percent a few days ago.

Commodities continued to drift lower, with copper hit by a weak flash manufacturing PMI out of China. The U.S. dollar marched higher and emerging market currencies slumped. Volatility was high in Brazil, which saw its currency rally nearly 8 percent on Thursday night after the central bank made comments about actively defending the real. Although this is a massive one day move, it only brought the real back to where it traded on Monday.

In the United States, the flash manufacturing PMI for September was solid and the same rate as August’s reading. New home sales were up strongly and jobless claims were lower than forecast. Second quarter GDP growth was revised up to 3.9 percent. This is the third and final estimate before a final revised figure is released in 2016. The only weak numbers were durable goods orders, down 2 percent, but still in line with estimates.

ETF Watchlist for September 23, 2015

WisdomTree Chinese Yuan (CYB)
WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares Japanese Yen (FXY)
CurrencyShares Australian Dollar (FXA)
CurrencyShares Canadian Dollar (FXC)
WisdomTree Emerging Market Currency (CEW)
WisdomTree Commodity Currency (CCX)
PowerShares DB U.S. Dollar Bullish Index (UUP)

The Federal Reserve’s decision to leave interest rates unchanged initially destabilized the U.S. dollar, which was followed by rumors that the European Central Bank would increase its quantitative easing program to push the euro lower. Today, there was additional speculation the ECB would enact additional easing. This has led to some volatility in the euro as well as the U.S. dollar.

The euro has been in an uptrend since March, but as the longer-term chart of FXE illustrates, its rebound has been remarkably weak. That said, there’s a chance of continued strength in the euro if the dollar fails to break out.  USDU should be watched closely as it is closer to providing a decisive signal. USDU is less than 2 percent away from its old high, and while currency funds tend to be less volatile, the high could be surpassed in a few days of volatile trading. As we mentioned in our ETF Watchlist for July 15: The U.S. dollar appears to be tracing out a multi-month correction. If the pattern continues at the present rate, the U.S. dollar could be challenging its old highs sometime in September or October. A major factor is the euro, which makes up 58.6 percent of the U.S. Dollar Index.








SPDR Energy (XLE)
FirstTrust ISE Revere Natural Gas (FCG)
Global X Copper Miners (COPX)
Market Vectors Coal (KOL)
Market Vectors Steel (SLX)

Domestic oil prices rallied on Tuesday thanks to a larger than expected decline in oil inventory, though the rest of the commodity space is flirting with multi-year lows. The latest impetus for weakness was the flash manufacturing PMI for China, which came in at 47, the lowest reading since March 2009. China is a major consumer of copper, coal, iron ore and other resources. China also overinvested in areas such as steel, to the point where in some cases, a single steel mill produces more steel than some major industrial nations. This steel is flooding world markets as producers can’t find buyers at home but need to generate cash to repay their debts.







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)

Weakness in the broader market weighed on most sectors over the past week. Materials, industrial and energy were among the weakest sectors, as they have been all year. Financials joined them due to the Federal Reserve’s decision to stand pat on interest rates.

Transports initially did well despite FedEx (FDX) reporting lower than expected earnings last Wednesday, but it then headed lower with the rest of the market.

Real estate rallied thanks to the Fed’s decision. Rate sensitive utilities were the best performing sector in the past week for the same reason.

Bank stocks fell on the Fed decision, but regional banks continue to power ahead as investors look towards an eventual rate hike later this year.

The homebuilder sector has performed surprisingly well recently. One theory for why this has occurred was due to the looming rate hike. Prospective home buyers may begin purchasing if they see prices remain stable but interest rates begin moving higher. In the wake of the Fed’s decision to hold off on a rate increase, ITB tumbled, which may substantiate this theory.




SPDR Gold Shares (GLD)

The Fed’s decision to hold raise rates steady was good news for gold. Over the near term, the price to watch is $106. Gold has been in an uptrend since China devalued the yuan in August and, if gold is to break away from the rest of the commodities complex, it will be currency risk that moves it.

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

The first chart below shows the price chart of HYG, unadjusted for dividends, versus the price of oil. The drop in oil and other commodities is driving the high yield market as investors grow concerned about the risk of bankruptcy in the energy sector. The drop in high-yield debt in the past week could reverse, as it did several times in the past couple of years, but given that oil is in a bear market, the more likely outcome is for oil to retest its lows.

HYG dipped over the past week, while LQD rallied as interest rates dipped and investors sought out higher quality credit. Although rates fell, the 10-year Treasury was very stable relative to the equity and commodity markets.





SPDR S&P 500 (SPY)
iShares Russell 2000 (IWM)
S&P Midcap 400 (MDY)
SPDR DJIA (DIA)
PowerShares QQQ (QQQ)
SPDR S&P Dividend (SDY)
iShares MSCI EAFE (EFA)

The Nasdaq is close to hitting a new relative high versus the S&P 500 Index. Other indexes remain in the same relative pattern, although SDY did rally on the Fed’s decision to not hike rates.