Month: March 2016

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)

Federal Reserve Bank of Atlanta President Dennis Lockhart and San Francisco Fed chief John Williams focused on the strong economy and rising inflation, inferring the possibility of higher interest rates over the coming months, though Yellen signaled China’s economy and low oil prices remain a concern. The Fed delayed hiking interest rates in 2015 due to trouble in emerging markets, holding off until December to implement a modest increase.

As of the market close on Wednesday, the S&P 500 Index is approximately 2.5 percent away from its all-time high. Dividend paying funds continue to lead the way, though small- and mid-caps are beginning to outperform.

WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares British Pound (FXB)
CurrencyShares Canadian Dollar (FXC)
CurrencyShares Japanese Yen (FXY)
WisdomTree Emerging Market Currency (CEW)

Yellen’s comments sent the U.S. dollar lower against a broad range of currencies. The widely tracked U.S. Dollar Index is approaching the key support level at 93. A break of that level would not end the bull market which began in July 2014, but it would create a bearish intermediate term outlook which could carry the index to 88 before it finds the next area of support. A 7 percent dip would likely be accompanied by a substantial rally in emerging markets and commodities over several months.

Britain’s polls have shifted in favor of staying in the EU; the pound rallied sharply last week as a result.

Commodity-related currencies, such as the Canadian and Australian dollars and emerging market currencies (CEW) rallied. Notably, all three have now erased losses going back to August 2015. The Australian dollar was particularly hard hit by China’s surprise devaluation.

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

Crude oil bears especially close scrutiny over the week ahead. While the U.S. dollar has weakened over the past few days, the price of crude oil remains in the high $30 range. Most industrial commodities display similar patterns, save steel, which broke out to a new 2016 high on Wednesday led by gains from miner Rio Tinto (RIO).

A correction in commodities is likely, and crude oil can dip towards the low $30s without risking the current bull rally. Two weeks from now, OPEC will meet in Doha, with non-OPEC countries invited as well. Iran said it will attend, but ruled out reducing production. A production freeze by other nations will do nothing to lift prices if the Iranians increase production.

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)
SPDR Retail (XRT)

Every sector gained ground over the past week except financials, which was dinged by Yellen’s speech on Tuesday. Higher interest rates raise the profitability of banks and investors in the sector would prefer they come sooner rather than later. Investors have priced in Fed policy though, and interest rate hike expectations are still much higher today than they were eight weeks ago.

In contrast to financials, utilities and consumer staples bounced on Yellen’s speech. Utilities use debt to finance operations and low rates are good for the bottom line. The relatively high yielding consumer staples sector benefits from yield hungry investors sticking with a stable producer of income. Dividend funds with overweighting in these sectors have thus far performed very well in 2016, besting non-dividend competition.

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

Investment grade bonds continue to rally as interest rates decline, but high-yield bonds paused with oil prices.

iShares MSCI Emerging Markets (EEM)

Emerging markets have benefited from U.S. dollar valuations and stronger commodity prices. EEM has erased nearly all of its losses going back to the August 2015 devaluation in the yuan. The rally failed in October, with EEM stalling at the important $36 level. The fund is a mere 5 percent from that level. Given the volatility in EEM, a test of this level is definitely possible in April.

U.S. markets kicked off the week with modest gains for the Dow Jones Industrial Index and the S&P 500, while the NASDAQ slipped 6.72 percent following Pandora’s (P) surprise announcement that founder Tim Westergren will be assuming the role of CEO.  The streaming music service has lost over half its value over the past year and the stock tumbled again in reaction to Monday’s announcement.

Last week, markets saw a small decline after several Federal Reserve officials issued hawkish comments on inflation and interest rates, despite lowered rate hike expectations inferred at the Fed’s March 16^th meeting. Speculators in the ever-changing futures market still do not expect an  April or June hike, though inflation expectations did fall.

Key data out this week includes the March employment report as well as Monday’s core PCE reading for February. The latter increased 0.1 percent in February, less than the expected 0.2 percent. On Friday, economists expect the government will report 200,000 new jobs were created in March, while the unemployment rate is forecast to remain unchanged at 4.9 percent. Average hourly wages are expected to have risen 0.2 percent. Strong job growth along with increases in wages and earnings could offset Monday’s inflation data, but the week will start off with a tailwind from lower than expected inflation in February.

February pending home sales reported 3.5-percent growth on Monday, exceeding estimates of 1.5 percent.  The Dallas Federal Reserve Manufacturing Survey also released encouraging data, indicating 3.3 percent growth and a rebound back into positive territory. In addition to the S&P/Case-Shiller House Price Index on Tuesday, Fed Chair Janet Yellen will be giving a speech to the Economic Club of New York. The Chicago Purchasing Managers Index (PMI) and weekly unemployment claims report will be released on Thursday. Analysts anticipate an expansionary reading above 50. European inflation data out on Thursday is expected to show deflation.

Friday’s reports will include light vehicle sales, the ISM manufacturing Survey and the University of Michigan Consumer Sentiment Index. All three reports are expected to indicate growth. March auto sales are projected to be 17.4 million. Chinese and European PMIs will also be out this week. Europe’s flash PMIs were generally positive last week and China’s PMI is always closely watched by commodities traders.

A few firms have yet to report prior quarter earnings. Sports apparel company lululemon athletica (LULU), memory chip giant Micron Technology (MU) and BlackBerry (BBBRY) will report this week. Analysts expect lululemon will report earnings per share of $0.80 on quarterly revenues of $691.6 million and Micron Technology (MU) will announce a net loss of $0.07 per share on revenues of slightly more than $3 billion.  BlackBerry (BBRY) is expected to deliver its latest quarterly earnings Friday and report a net loss of $0.09 per share on revenues of $563 million. Analysts will focus on the progress of new CEO Jon Chen’s turnaround strategy.

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)

SPY held above $200 per share, peaking at $204 yesterday. A challenge of previous highs could come soon if the market continues climbing at its current pace. IWM cleared $109 on Tuesday before retreating today. While consolidation of gains may occur over the next few days, recent performance is an optimistic sign for the weeks ahead.

iShares Nasdaq Biotech (IBB)
SPDR Biotech (XBI)
SPDR Pharmaceuticals (XPH)

Valeant Pharmaceuticals (VRX) hampered the biotech and pharmaceutical sectors a week ago, but has rallied by 28 percent since Monday. Both sectors are looking to turn around their relative performance and they may get a chance if the recent rally consolidates as shares are relatively undervalued following the selloff to begin 2016.

WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares British Pound (FXB)
CurrencyShares Canadian Dollar (FXC)
CurrencyShares Japanese Yen (FXY)
WisdomTree Emerging Market Currency (CEW)

Currency markets have been stable over the past week. The U.S. dollar has moved lower, but has not breached any important support levels. The yen and euro held steady and the emerging market currencies pushed higher.

The British pound slid on Tuesday following rumors of Queen Elizabeth II’s support for a British exit (Brexit), while recent polls indicated 50/50 odds for the June referendum. A possible Brexit could be problematic for the pound, and as the vote approaches, the pound may begin trading in correlation with the polls.

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

Crude oil production fell to its lowest level since November 2014 last week. Shale oil can be tapped quickly, which leads to rapid spikes in production as well as rapid declines in production as the wells run dry. Low oil prices led producers to cut investment and drilling for new wells, which is now having the corrective effect of reducing supply. However, while supply is declining, demand has yet to pick up; inventories have jumped to near 2015 highs. The OPEC meeting in Doha on April 16 will include non-OPEC countries including Russia. A meeting between Russia and Saudi Arabia in February produced an agreement to freeze production, but it needs broader support to have a lasting impact.

Commodities have fueled the broader stock market rally, with XLE rising more than 20 percent off its lows and SLX climbing more than 50 percent. If S&P 500 gains consolidate, commodities are likely to pull back, placing SLX at the highest risk due to its rapid run-up.

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)
SPDR Retail (XRT)

Both utilities and consumer staples have been market leaders in 2016, but they may be fading as recession fears decline. The real standout has been industrials. Relative to the S&P 500 Index, industrials bottomed in July 2015 but XLI is now close to its 52-week high.

iShares iBoxx High Yield Corporate Bond (HYG)
iShares iBoxx Investment Grade Corporate Bond (LQD)
Weakness in utilities and consumer staples occurred prevailed last week despite lower interest rates. Treasuries, investment grade bonds and high yield bonds all rallied. The 30-day SEC yield on LQD remains at a healthy 3.5 percent.

SPDR Gold Shares (GLD)
Market Vectors Gold Miners (GDX)

An overdue gold correction appears to be underway. Gold peaked with the European Central Bank’s increased quantitative easing and interest rate cuts, while gold miners peaked with the Fed’s decision to slow the pace of rate increases. Caution is especially warranted for GDX, which could see a significant decline over the coming weeks.

Domestic equities are aiming for a sixth consecutive week of gains in a holiday shortened-week; U.S. markets will close for Good Friday, and some European markets will be closed Thursday and Friday.

The market rallied last week following the Federal Reserve’s policy statement, which pointed to fewer rate hikes in 2016. The central bank now plans a maximum of two hikes this year rather than the four it forecast at the end of 2015. The Federal Open Market Committee (FOMC) also lowered its inflation target for the year. Both the Dow Jones Industrial Average and the S&P 500 Index are up for the year coming into this week. With the fear of a recession diminishing, investors continue to add equities exposure. Broad-based dividend funds, such as Vanguard Dividend Appreciation (VIG) are trading near or beyond all-time highs due to strength in utilities and consumer staples. The Nasdaq and Russell 2000 still have a bit more ground to cover as growth stocks catch up.

Existing home sales data for February will be released on Monday. Analysts anticipate a slight drop to 5.30 million homes sold from January’s 5.47 million units. On Wednesday, February new home sales are expected to climb to 523,000, up about 30,000 from January. Durable goods orders, the Kansas City Fed Survey of Manufacturing Activity and weekly initial unemployment claims are scheduled to report on Thursday.  Analysts project a 2.7-percent drop in February’s durable goods orders and a 0.5-percent drop in core capital equipment orders. Weekly initial unemployment claims are projected to rise slightly from the prior week. Although the market will be closed on Friday, the government will report the third and final estimate of fourth quarter GDP, which is expected to illustrate 1.0 percent growth.  Flash PMI reports for various countries, including the United States and EU nations will be released this week as well.

Earnings will be light this week, but a few releases to watch include Petrobras (PBR), ExOne (XONE), Nike (NKE), Red Hat (RHT) and GameStop (GME). Despite rising oil prices, Brazilian energy giant Petrobras is expected to report a net loss of $0.06 per share Monday based on revenues of $25.47 billion. Investors will be paying close attention to the company’s production levels. PBR is a key holding in many Latin America and Brazil funds. 3D printing company ExOne (XONE) is expected to report a loss of $0.15 per share on revenues of $14.71 million. On Tuesday, Nike (NKE) is expected to report EPS of $0.49 and revenues of $8.20 billion. Nike is a Dow component and a major holding in consumer discretionary funds. Cloud technology company Red Hat (RHT) will also release fourth-quarter earnings on Tuesday. Analysts are calling for EPS of $0.47 and revenues of $537.20 million. GameStop (GME) is expected to report EPS of $2.25 and revenues of $3.56 billion based on improving sales.

Beyond the equity rally, this week’s focus will be on the strength of the U.S. dollar and oil prices. The weaker dollar has enabled the price of West Texas Intermediate Crude (WTI) to top more than $39 per barrel, turning the energy sector from a burden to a blessing for the broader stock market, at least temporarily. Other commodities have benefited from the weak dollar as well. Reports of rising U.S. oil production will provide a test for the market this week. Many commodities are “overbought,” a technical signal that indicates a pullback is likely, though not guaranteed.