Month: June 2014

Due to the Independence Day holiday in the United States, this will be a shortened trading week. Even more, traders often take off early on Thursday, making for even lighter volume. Sometimes this can lead to volatility, especially if there’s a surprise in any forthcoming economic data.

Over the coming days, attention will be focused on the S&P 500 Index, Dow Jones Industrial Average and Dow Jones Transports, all of which are close to new all-time highs. The Russell 2000 has a bit further to go, but could also hit a new record if this week is strongly bullish. Emerging markets are also on the cusp of a larger breakout to the upside, though they still remain in a technical bear market. In other positive news, the Nasdaq has rallied to a new 52-week high last week.

Halfway through the year, the predominant story has been the strong rally in energy and materials prices. Energy and utilities were the top performing S&P 500 sectors over the past 6 months. Rising commodity prices also benefited emerging markets, which is why the broad emerging market funds are on the cusp of multi-year highs. Brazil was one of the strong performers, helped by rising oil prices, as Petrobras is a dominant stock in their stock market. Should emerging markets push higher in the next few weeks, this could mark a major turning point for the asset class. Emerging market funds have been in a bear market since about 2011.

Higher energy prices are also benefiting the United States, as it has become expensive to import foreign made goods. While this may not seem positive, both foreign and domestic manufacturers are beginning to relocate production back to the United States. This is a big component of the rising manufacturing data and a reason why the outlook for the economy remains strong over the rest of the year.

Economic Reports: This week we’ll see June manufacturing PMIs for a number of nations. The two most important reports are those of the United States and China, which are both expected to show increases over May’s numbers. On Tuesday, motor vehicle sales for June will be released; this has been a bright spot recently and it will be interesting to see if the trend continues. On Thursday, the trade balance for May is released, along with the ISM services number. Finally, Federal Reserve Chairman Janet Yellen is making a speech to the IMF on Wednesday.

Earnings: Extremely light week for earnings, one week ahead of the Q2 earnings season kickoff. This week the headliner is Constellation Brands (STZ).

Stocks rallied in late trading on Friday, concluding a relatively flat week for the indexes. The S&P 500 gained 0.19 percent, while the Dow Jones Industrial Average was up 0.03 percent for the day. For the week, the S&P 500 and DJIA lost 0.1 and 0.6 percent, respectively. The Nasdaq continued to move higher however, gaining 0.4 percent on the day and 0.7 percent for the week. With only one trading day left in June, each of the indexes is positioned to finish higher for the month.

We now understand why Janet Yellen wasn’t disturbed by the jump in the inflation data last week. The CPI for May came in at 0.3 percent, indicating inflation could be heading above the Fed’s target range. However, the core PCE (personal consumption expenditures) for May was 0.2 percent. Since this is the gauge the Fed uses to implement policy decisions, it tells us the Fed will remain dovish for the time being. The trend in inflation remains upward, but until the core PCE starts moving higher, the Fed will not change its current policy orientation.

Additionally, the PCE report showed consumer spending was up only 0.2 percent, in line with inflation. This is quite disappointing and may cause some economists to start cutting their second quarter GDP growth forecasts. Growth rates should still be solid, but may not reach the 4 percent level many had predicted.

Combined with the first quarter GDP final estimate reported on Wednesday, it’s easy to see why the Federal Reserve isn’t worried about inflation. Government economists estimated the economy contracted at a 2.9 percent annualized rate in the first quarter. If the economy grows at 3 percent for the rest of the year, GDP growth for 2014 will be 1.5 percent, at the low end of the post-2008 range.

The weak data rattled stock market investors, but equities stayed near their highs. Technology stocks continued to recover from the spring sell-off as the Nasdaq Composite reached a new 52-week high on Wednesday. Volatile sub-sectors such as biotechnology and internet shares were also steady. If the prospect of slower growth continues, investors will likely gravitate towards more aggressive sectors in search of higher returns.

Slower growth will also favor high quality dividend paying companies. If interest rates remain low, it will keep dividend shares attractive relative to fixed income. Dividends may also make up a larger portion of stock returns as a result of weaker growth numbers.

It is not time to concede a slower growth trend just yet. This week we also saw the flash PMI for June, which climbed to a reading of 57.5. Anything above 50 indicates expansion in the manufacturing sector. Rail data also continues to show a pickup in the economy. Manufacturing leads the economy and this pickup signals stronger growth over the coming months. In contrast, consumer spending is a lagging indicator. The U.S. economy has a large consumer sector, but consumption is the last stage of the economic cycle. When manufacturing, raw material and energy production is improving, it is a very good sign. We will just have to wait to see if the growth rate will be as strong as once predicted.

Market Vectors Gulf States (MES)

The Gulf States ETF has plunged in June, down from $35 per share to $30.60 as of Tuesday’s close. The fund is partially feeling the effects of instability in Iraq, but the main culprit is the plunging stock market in Dubai. Although MES has little exposure directly to the Dubai market, its 25 percent plunge since peaking in May has investors in the region rattled. Comparisons between the Dubai stock market over the past few years and Nasdaq in the two years leading up to 2000 makes for a very close match, which has many wondering if this is a bubble bursting.

Despite the fear caused by the Dubai market’s plunge and tensions in Iraq, MES will benefit from higher oil prices and the financial centers in the region are areas of stability. The main question at the moment is whether Dubai is experiencing a correction or a much more significant selloff.

iShares Russell 2000 (IWM)
PowerShares QQQ (QQQ)

The two charts below show IWM and QQQ relative to SPDR S&P500 (SPY). Generally, when bullish conditions exist in the market, QQQ and IWM will outperform SPY. That won’t be the case when value leads growth or when large caps lead small caps, as they deliver a good portion of their outperformance during bear markets and pullbacks. We saw this occur in the spring when the Dow Jones Industrial Average was the top performing index.

QQQ is in the better position here, having staged a stronger recovery. However, the relative performance looks good and we should expect to see the Nasdaq and small caps continue to lead the market higher.

iShares MSCI Emerging Markets (EEM)

Emerging markets still have not significantly broken out, which isn’t atypical for a fund reaching a resistance point. For short-term traders, EEM should be watched closely because it will only take a small rally to break the resistance and push higher.

Global X Copper Miners (COPX)
PowerShares DB Base Metals (DBB)

Industrial metals and copper have enjoyed a rally of late. China’s recent port scandal didn’t impact copper significantly and metals prices are rising, despite the slowing of the Chinese economy. Copper imports for May plunged 17 percent in China. Furthermore, the growing port scandal could further dent demand as an estimated one-third of imports are used as loan collateral. For now, many banks have stopped making these types of loans until the situation is resolved.

Given China’s slowing imports, the rally could be another signal of a pickup in inflation. COPX is traded at its highest level in months and a rally of 30 percent could unfold if this is a genuine breakout. For DBB, it’ll take a bigger push before it looks like shares can recover to the $20 level, but that too represents a solid gain of about 20 percent.

SPDR Energy (XLE)

Energy equities experienced their first pullback after a month of gains. Energy ETFs were down 2 percent on Tuesday, with subsectors down 3 percent or more. SPDR S&P Oil & Gas Exploration & Production (XOP) fell close to 4 percent. First Trust ISE Revere Natural Gas (FCG) slipped 3.5 percent.

Oil prices held firm. Price are off their highs for the week, but still above levels seen two weeks ago. The selling in the equity shares could indicate investors are bearish on the short-term direction of energy prices, but if oil holds up, we should see the energy shares recover and move on to new highs.

SPDR Retail (XRT)

The S&P 500 sector that suffered the most thus far in 2014 is consumer discretionary. Moreover, retail took a hit right at the start of the year when high expectations for the Christmas sales season were not met. Retail made a near-term bottom right about the same time as small caps bottomed in late May. Since then it has staged a solid rally and sits within 3 percent of its 52-week high.

First Trust Dow Jones Internet (FDN)

On Tuesday, the Dow and S&P 500 fell about 0.6 percent each, while the Russell 2000 was down more than 1 percent. The Nasdaq was the best performer due to strength in Internet names, losing only 0.47 percent. Unlike other beaten down sectors, the recovery in FDN has been very steady. Global X Social Media (SOCL) also displays the same steady recovery pattern.

Market Vectors Gold Miners (GDX)

Investors piled into gold mining shares in June, sending GDX up nearly 20 percent from late May levels. As the longer term chart shows, the mining shares are still in a downtrend, even if they have done better this year.

It would take a move above $30 to get the bulls exited and open up the potential for much larger gains. Currently, breaking that resistance level would require another gain of about 20 percent. As with emerging markets and industrial metals discussed above, breaking resistance presents a lot of upside.

There is positive news out of China to start the week as HSBC released their flash PMI number for June. The reading came in at 50.8, the highest in 7 months and indicates the manufacturing sector in China is back at expansionary levels. China still bears close watching; while the pickup in manufacturing is positive, the sector is closely tied to the global economy. The main risk in China still lies with the real estate sector and credit excesses. Still, from an American perspective, the rising PMI in China is good news.

An improving PMI out of China is also good news for energy demand. West Texas Intermediate Crude (WTIC) climbed back above $107 a barrel, a level it briefly held following the ISIS invasion of Iraq. WTIC is likely to stay in a narrow trading range this week. If it moves above $110 or below $104 per barrel, it would signal a short-term breakout to the up/downside.

Emerging markets are also near a high for 2014 but shares have traded sideways for eight days. The asset class has been weighed down by the inevitable pull back in India’s market, though shares in Russia, China and Brazil have also traded sideways. Although it doesn’t have far to go for a new high, the iShares MSCI Emerging Markets ETF (EFA) and similar funds paused right near a resistance line. A push higher would likely continue for several days as shorts are covered and bullish traders move in.

Markit released its flash U.S. Manufacturing Purchasing Managers Index for June this morning. The reading of 57.5 is the highest level since April 2010, indicating our domestic economy is continuing to improve. It was also a significant jump compared to 56.4 in May. Chris Williamson, the Chief Economist at Markit indicated “The strong reading also rounds off the best quarter for factories for four years, adding to indications that the US economy rebounded strongly in the second quarter from the weather-related weakness seen at the start of the year.”

Economic Reports: Existing and new home sales for May will be reported. On Wednesday GDP revision will be released. Currently, the consensus is in the range of negative 1.7 percent to negative 2 percent growth in Q1.

Also, this week we’ll see core PCE for May, or personal consumption expenditures. The PCE price index is similar to core inflation and is the actual number the Federal Reserve uses for deciding policy. It is similar to the core CPI number we saw last week, which showed inflation at 0.3 percent in May, above forecasts of 0.2 percent. If PCE doesn’t match the rise in the core CPI, we will know why Yellen said the CPI number was “noise.” If it does pick up, energy and commodities should benefit along with stocks in general.

Look for the Dow Jones Industrial Average, Dow Transports and the Nasdaq to make new all-time highs this week. The Russell 2000 still has a ways to go, but it led the indexes last week and is likely to do so again if we get another up week.

Earnings: A light week for earnings that will see Nike (NKE), Carnival (CCL), Monsanto (MON), Walgreen’s (WAG), KB Home (KBH), Lennar (LEN) and General Mills (GIS) report.