Market Perspective for May 31, 2016

Markets opened the holiday-shortened week with improving economic data. There’s a fair amount of key economic and earnings news due out in the coming week, notably the May U.S. non-farm payroll report, the last major labor market report before the June Federal Reserve meeting. Various Fed officials, including Fed Chair Yellen, have implied raising interest rates by another 25 basis points or signal a July hike at the June 15 meeting.

Japan started the week on a positive note. Japanese Prime Minister Shinzo Abe plans to delay a sales tax increase until 2019 with further stimulus measures expected to follow. Various PMI indexes will be released on Wednesday. Thursday, the European Central Bank (ECB) is expected to leave interest rate policy unchanged. The Brexit vote looms large with three weeks until the vote.  Those in favor of remaining in the EU are firmly ahead in polls, which has resulted in rise for the British pound.

In the U.S, the S&P/Case-Shiller House Price Index for March showed a 0.8 percent monthly increase. Home prices are up 5.2 percent year-over-year.  PMI for U.S. manufacturing will be released on Wednesday.  The ISM manufacturing survey is expected to decline slightly to 50.3. Last week, the flash Markit PMI came in at 50.8, but the market shrugged it off. In contrast to potentially weaker May PMIs, the latest Fed Beige Book is expected to reflect continued strength in the industrial sector and overall business confidence.

The Energy Information Administration (EIA) is expected to report an increase in last week’s crude inventory. Oil will try to crack $50 a barrel this week. May auto sales report will also be out this week and is expected to show a slight decrease in the annual sales rate after hitting a record high pace in April.

 Thursday’s weekly unemployment claims report will be overshadowed by the May labor report on Friday, which includes the unemployment rate and average hourly wages. Economists forecast a dip in the unemployment rate to 4.9 percent. Factory orders for April will also be available on Friday.

Financial markets are still uncertain about a Fed rate hike given the central banks proclivity for changing its mind, but overall positive data this week will likely push the market to near certainty (as certain as financial markets get) of a rate hike by July.

As earnings season nears its end, investors will hear reports from medical device manufacturer Medtronic and luxury goods retailer Michael Kors. Other leading companies reporting this week include the semiconductor and communications technology firms Broadcom and Ciena. Tuesday, Medtronic (MDT) is expected to report earnings per share of $1.26 on revenues of $7.49 billion. The company has raised its dividend 38 consecutive years and investors are anticipating another dividend hike in the near future. MDT is 14 percent of iShares US Medical Devices (IHI) and 23 percent of Fidelity Select Medical Equipment and Systems Portfolio (FSMEX).

The battered retail sector could hit the luxury fashion segment when Michael Kors (KORS) reports. Shares have fallen in May along with department stores, but the company’s handbags are reportedly being removed from Nordstrom (JWN).  Consensus estimates call for EPS of $0.97 on revenues of $1.15 billion.

The semiconductor and wireless communications industry will take center stage later in the week when Broadcom (AVGO) and Ciena (CIEN) report Thursday. AVGO is expected to deliver EPS of $2.38 and revenues of $3.55 billion. Analysts forecast CIEN will report EPS of $0.27 on revenues of $630.7 million. AVGO is 11 percent of iShares PHLX Semiconductor (SOXX).

Market Perspective for May 27, 2016

The markets rallied more than 2 percent heading into the long Memorial Day weekend. U.S. Federal Reserve Chair Janet Yellen continued laying the groundwork for a summer rate hike in a statement on Friday which highlighted improving economic data; markets have priced in the odds of a June increase at over 30 percent and 58 percent for July. Financials, health care and technology all posted gains as possible rate hike expectations stabilized. Gold was down on the week, but the price of West Texas Intermediate Crude reached an intraday high above $50 per barrel on Thursday before retreating back into the $49 to $49.50 range.

Overseas, the Japanese yen held steady on signs of weak growth and a decline in the CPI, both of which spurred Japanese stock sales in anticipation of more central bank asset purchases. European manufacturing, services and composite PMI data released Monday showed weaker than expected growth. Tapping a 16-month low, the 52.9 reading was lower than the 53.2 consensus estimate and also supports central bank intervention.

U.S. economic reports were much stronger. On Monday, new homes sales smashed expectations by nearly 17 percent as Americans bought homes at the highest rate since January 2008. Buyers were encouraged by a steady job market and low mortgage rates. Home purchases fueled the 2.1 percent increase in the weekly mortgage application index. Pending home sales in April also rose to their highest level in almost a decade.

On Thursday, better-than-expected weekly unemployment claims were reported and orders for durable goods rose 3.4 percent. Economists were looking for an increase of only 0.7 percent. The number of Americans filing for unemployment fell to 268,000, below estimates.

On Friday, the Bureau of Economic Analysis released the second estimate of Q1 GDP growth, raising it from 0.5 percent to 0.8 percent. All of the positive reports in the past week lifted the Atlanta Federal Reserve’s real-time Q2 GDP growth forecast to 2.9 percent.

In earnings news, Hewlett Packard (HPQ) beat consensus earnings estimates. Shares rose on the company’s decision to merge Hewlett Packard Enterprise’s (HPE) business IT Services unit with Computer Sciences (CSC). The merger is considered beneficial to both companies in terms of cost savings and economies of scale. In retail earnings, Costco (COST) easily beat consensus earnings and revenue estimates. The warehouse giant’s sales growth continues to surpass those of its rivals Wal-Mart and Sam’s Club. Ongoing weakness in the retail apparel sector was reflected by the drop in shares of Abercrombie & Fitch (ANF), which fell when the company missed expectations. Deep-discount chain Dollar General (DG) bucked the trend and posted strong results that readily beat expectations with same store sales up 2.3 percent. Sears (SHLD) sales, revenues and earnings were disappointing, but the company’s shares rose on news that the organization was exploring partnership arrangements for some of its popular brand names like Craftsman tools and Kenmore appliances to regain profitability.

Consumer discretionary, financial and healthcare sector funds rallied more than 2 percent on the week. The technology sector enjoyed the strongest performance climbing more than 3 percent as tech giants such as Apple (AAPL) share prices recovered. The Nasdaq won the week as it rallied more than 3 percent. The Russell 2000 Index beat large-cap competition, but both the S&P 500 and Dow Jones Industrial Average gained more than 2 percent on the week.

ETF Watchlist for May 25, 2016

iShares U.S. Home Construction (ITB)

The possibility of a June or July rate hike and robust economic reports have rallied this week’s markets. On Tuesday, housing delivered a huge boost in favor of rate hikes when April new home sales soared to 619,000, almost 100,000 units above expectations. New home sales had been stuck in the range of 500,000 units for well over a year and this breakout has some economists expecting the economy will follow. Home prices tend to follow changes in sales volume, so if this uptick in sales holds in the months ahead, it points to higher prices and also higher inflation. ITB gained nearly 4 percent on Tuesday.

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

Year-over-year headline inflation was only 1.1 percent in April, below the core inflation rate of 2.1 percent, largely due to oil. Headline inflation, however, advanced 0.4 percent in April alone, a nearly 5 percent annualized rate. The jump was due in part to much higher oil prices. XLE gained nearly 1 percent early in the week and could continue to rally if oil prices break above $50 a barrel.

Steel, coal and copper mining ETFs reversed due to the rising optimism over U.S. economic fortunes. Iron ore and copper markets, however, are dominated by China. Even if the demand for U.S. steel rises, further weakness in China will offset it.







iShares US Medical Devices (IHI)
iShares US Health Providers (IHF)
iShares Nasdaq Biotechnology (IBB)
SPDR Pharmaceuticals (XPH)

Biotech and pharma shares benefited from renewed optimism and advanced strongly in the past week. The big rally in these two sectors helped lift broad healthcare sector funds. Medical devices remains the strongest subsector and another day or two of strength will carry it to a new 52-week high.



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)

The Russell 2000 Index joined S&P 500, Dow Industrials and S&P 400 Mid-cap Index in positive territory this week. The Nasdaq still trails, down 2 percent this year. SDY remains an outperformer and investors have shrugged off any concerns about rising rates. Although utilities have slipped, other dividend paying sectors such as consumer staples, energy and pharmaceuticals have been rallying.

As for the S&P 500 Index, the old highs remain only a few percentage points away. A move back above April’s high is the first hurdle.


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)

Odds of a rate hike in the futures market are currently at 34 percent for June, and have moved up to 57 percent for July. Historically, the Fed has hiked when odds cross 70 percent. If the Fed wants to hike, it will continue guiding the market higher in the coming weeks.

Emerging market currencies are following commodity prices lower, as are the Canadian and Australian dollars. The British pound is advancing on polling data showing a huge lead for the Remain side.

The euro remains in an uptrend off the December 2015 low, but it is sitting at uptrend support. A drop to $108.50 or lower would be near-term bearish for the euro to support further U.S. dollar strength.






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)

Monsanto, which (MON) comprises 10 percent of XLB, rejected a buyout offer from Bayer, presumably to negotiate a higher price. Materials rose in reaction to the news. Technology saw broader support, with subsectors such as semiconductors rallying. iShares PHLX Semiconductor (SOXX) hit a new high for 2016 yesterday. Technology is also benefiting from the rebound in shares of Apple (AAPL) and Microsoft (MSFT), two stocks that pulled funds such as XLK lower in April. The Internet sector advanced too, with FDN approaching its high in 2016.

The chart below illustrates SPDR S&P Regional Banking’s (KRE) strong advance on the back of interest rate expectations and strong housing data. A stronger housing market and rising interest rates will be a potent bullish combination for smaller banks.






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

Bonds have firmed over the past week. This led to sideways trading in LQD the 10-year treasury yield. With credit risk taking a back seat to interest rate concerns, this relationship should hold in the near future, with higher yields leading to a lower price for LQD, and vice versa.



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

Financials benefit from rising interest rates and they are the dominant sector in many value funds, but technology also performed very well over the past week.

Market Vectors Gold Miners (GDX)
Global X Silver Miners (SIL)
SPDR Gold Shares (GLD)

Gold has fallen considerably throughout the equity rally and a key support level for gold is approaching. A break below $114 for GLD or $1180 on gold is possible and most investors will be steering clear of the metal in the near-term. Even if gold fails to drop much further, the more volatile miners could see significant declines before stabilizing. GDX could easily slide to $19, a 17 percent drop from current levels.




Market Perspective for May 23, 2016

St. Louis Federal Reserve Bank President Bullard confirmed the Fed’s position regarding rate increases in a Monday appearance in Beijing. Strong labor markets favor rate hikes, but slow GDP growth and low inflation expectations dictate a slower pace.  Fed Chair Yellen is scheduled to speak at Harvard on Friday.

The G-7 finance ministers’ meeting continues in Japan this week, followed by the meeting of world leaders this coming weekend. There is speculation that the Japanese government will delay a sales tax increase and engage in another round of quantitative easing, but there was friction over the weekend after U.S. Treasury Secretary Lew urged Japan to refrain from competitive devaluation.

The flash manufacturing PMIs for May in both the U.S. and EU will be released on Monday. Japanese CPI data will be released Friday and is expected to show that the country is still mired in a recession, which supports the premise that the Bank of Japan will continue to ease its monetary policy.

Domestic news on tap this week includes April new homes sales data; the consensus estimate is for a slight increase. The weekly mortgage application index out Wednesday and April pending home sales on Thursday are also expected to show an increase. Other important economic reports Thursday include the initial weekly unemployment claims, durable goods orders and the Kansas City Fed manufacturing survey. These reports are expected to show continued strength in the economy and job market. The second estimate of first quarter GDP is due out on Friday. Economists project a significant uptick, from 0.5 percent initially to 0.9 percent growth.

Earnings season is winding down, but a few retail earnings are still reporting. Costco (COST), Abercrombie & Fitch (ANF), Dollar General (DG) and Sears (SHLD) are among those delivering earnings. The earnings reports from retailers ANF and SHLD will provide additional data points for assessing the recent weakness in the apparel and department store sectors. Both companies are expected to report a loss for the most recent quarter. Discount retailers COST and DG are expected to deliver better-than-expected earnings numbers similar to Wal-Mart (WMT), which reported last week. Strong numbers will support the idea that retail weakness is confined mainly to the department store sub-sector. Hewlett Packard (HPQ) will also report this week. Analysts will be looking at the shift from PCs to mobile devices.

The major averages have remained in a relatively tight trading range since the end of March. Strong earnings and economic news could provide the catalyst that stocks need for their next leg higher.