ETF Watchlist for July 30, 2014

Global X Social Media (SOCL)

Two weeks ago, negative comments about social media valuations in the Federal Reserve’s semi-annual report to Congress weighed on the sector. Since then, social media stocks have rallied strongly. Facebook (FB) surprised with a much stronger than expected report last week. Yesterday, Twitter (TWTR) announced positive earnings, even though analysts have forecasted a loss. Shares jumped nearly 30 percent in after hours trading. While Twitter is less than 4 percent of SOCL, a 30 percent move, if it holds, will deliver a gain of more than 1 percent for the fund.

In order for the picture to turn bullish for SOCL, the fund needs to climb above the near $20 level seen in early July. That is a less than 2 percent move away from Tuesday’s close and if the Twitter gains hold, adding 1 percent to NAV, a new short-term high could come very soon.

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iShares FTSE/Xinhua China 25 (FXI)

Chinese shares rallied over the past week, both in Hong Kong and on the mainland. Investors turned optimistic following improvements in provincial GDP growth and some easing of real estate buying restrictions. This move can also be seen as a delayed effect. We have featured copper mining shares a few times before and China is the main driver of demand growth. Optimism over China’s economic performance pulled copper and other industrial metals higher going on three months; it was only a matter of time before China itself joined in.

A short-term rally may occur over the next month. However, we may not know before September or October if the gains will hold.  By then, real estate data will indicate a major slowdown or stabilization in prices. Traders may want to play the rally, but long-term investors should wait for a clearer bullish signal. China grew faster thanks to short-term stimulus plans aimed at shoring up political support. The leadership is in the middle of a massive anti-corruption campaign that is taking down political enemies at a rapid pace. Once the leadership is confident in its position, it will have greater latitude to allow home prices to fall and GDP growth to slow as part of their reforms. On the flip side, if by September and October real estate prices have bottomed, it would be a solid sign that the government is going to ease policy and print money to avoid any slowdown, in which case the market should move higher.

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iShares PHLX SOX Semiconductor (SOXX)

Weakness in Qualcomm (QCOM) and Applied Materials (AMAT) hit the semiconductor sector for a big loss over the past week. QCOM was whacked by news that it was having trouble collecting royalties in China. Soon after, news indicated China would declare QCOM a monopoly and fine the firm. U.S. technology firms have been targeted by China’s government in the wake of the NSA spying revelations, with Microsoft (MSFT) recently hit with an investigation and IBM also coming under attack.

The slide in price, whatever the reason, isn’t a big surprise given that SOXX is one of the highest ranked funds in terms of momentum. Momentum stocks and funds tend to be very volatile, particularly when it comes time for a sell-off. SOXX slipped about 5 percent in a little over a week. However, it is still up 20 percent since early February, better than double the return for the S&P 500 Index.

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SPDR Energy (XLE)

The two best performing sectors in the first half were energy and utilities. Over the past month, they are the two worst performers. Energy has gone sideways since mid-June as oil prices (the black line) have been in a downtrend. Nevertheless, it would not take much to push XLE higher considering Exxon (XOM) reports earnings later this week and is 15 percent of the fund’s assets.

In contrast with XLE, the more volatile FCG has tracked closely with oil and natural gas prices.

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Market Vectors Rare Earth (REMX)

The rally in Chinese shares and industrial metals is branching out into the more volatile segments of the market. For example, REMX is up more than 10 percent in the past six weeks. Coal and uranium are up as well. Rare earth miners have been in a bear market since 2011.  It will take some time before we are convinced this rally will be sustained.

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Market Vectors Russia (RSX)

Russian shares are cheap once again. New economic sanctions from the EU pushed the Russian stock market lower and the slide in energy prices doesn’t help. Shares of RSX have been making a series of lower highs and lower lows since 2011. This is a textbook bear market but Russian valuations are also very cheap relative to global markets. Until the pattern of lower highs and lows is broken, the forecast will be for lower prices. However, long-term investors looking for value should have Russia on their list of markets to investigate.

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Market Perspective for July 28, 2014

While last week was heavy on corporate earnings, the release of economic data will be the focus over the coming days. Second quarter GDP will be announced on Wednesday along with the results of this week’s Federal Open Market Committee meeting. The Fed is nearing the end of its taper process and this will be the second to last meeting before its scheduled October exit. There’s unlikely to be any surprising or drastic changes as data has been relatively consistent.

Earnings will remain important, but we have passed through the halfway point in terms of the major reports. There are still a number of blue chips reporting, but down from the influx we saw over the past few days. Proctor & Gamble (PG) and Exxon (XOM) will be two companies to pay attention to.

Overseas, Chinese stocks rallied sharply as investors have quickly become more optimistic over government stimulus efforts. GDP growth rates increased from the first to second for many provinces, while buying restrictions have started to ease. Industrial metals and mining shares have also rallied on expectations of stronger Chinese growth. Whether sustainable growth materializes is another issue: the second quarter growth rate was boosted in part by having local governments move their development projects forward, spending all of their annual investment budgets in some cases. Nevertheless, because China is a large component of many emerging market funds, this will provide a positive start to the week for those shareholders.

Year-to-date, the S&P 500 Index remains the top performing index, up 7.03 percent. It is closely followed by the Nasdaq, which has gained 6.54 percent. The past few weeks have been strong for technology stocks and that has made the Nasdaq the best performing index over the past 4 weeks and 3 months. The Dow Jones Industrial Average is up a decent 2.32 percent, and the MSCI EAFE follows closely behind, up 2.31 percent. The Russell 2000 remained the outlier, down 1.63 percent this year.

Economic Reports: This will be a big week for economic data. GDP comes out on Wednesday and analysts are looking for 3.2 percent growth. There is quite a range of estimates though, ranging from about 2.6 percent to 3.5 percent. Solid growth around 3 percent is still expected, but some economists trimmed their forecasts. The market is already looking towards stronger growth during the second half and an upside surprise would reinforce the positive outlook.

Domestic auto sales and July unemployment will also be released on Friday. The PMI numbers for several countries will also be reported.

Market Perspective for July 25, 2014

With earnings season underway, it looked to be a positive week for the markets, until the sell-off Friday. The Dow Jones Industrial Average fell below 17,000, losing 123.23 points on the day. The S&P 500 and Nasdaq also lost ground, giving up 0.48 percent and 0.50 percent, respectively. For the week, the S&P 500 was flat, while the DJIA lost 0.90 percent. The Nasdaq, however, moved higher for a second week, gaining 0.40 percent.

Apple (AAPL), a staple in technology funds, beat estimates by a solid margin and is pushing the stock price towards the psychologically important $100 level. That is also the 7:1 pre-split high for Apple, so a push through into the low $100s would be very bullish.

Facebook (FB) was another technology firm that provided sound results, which the company’s earnings more than doubling from the prior year. Earnings were 42 cents per shares, well ahead of estimates of 32 cents per share. The stock jumped 5 percent and provides a big lift to the social media sector. Only last week, the sector took a hit from the Federal Reserve report that said valuations were “stretched” in the sector. Whether you agree with the Fed, Facebook’s strong results this week show how quickly those valuations can be brought down.

The big disappointment came from Amazon (AMZN), a firm invests very heavily in technology infrastructure and operates on razor thin margins. In the prior quarter, the firm lost more than $100 million, despite nearly $20 billion in revenue. Shares slumped 10 percent in the wake of the report.

Even though Amazon’s report was weak, the general trend for the sector is very positive. Both Intel (INTC) and Microsoft (MSFT) have seen their share prices rally strongly on good earnings (in the case of Intel) and a reorganization plan (from Microsoft). These two giants remain important components in many technology funds and they are breaking out of decade long basing patterns. If this trend in tech shares continues, the Nasdaq could exceed its old high at some point in the next 12 months.

Non-tech blue chips delivered respectable results as well, including Ford Motor (F) and Starbucks (SBUX). Caterpillar (CAT) in particular, disappointed. Even though earnings beat expectations, revenues were lower than expected. This implies the slower growth in China remains an issue, as Caterpillar benefits from strong natural resource demand. China managed to increase growth in Q2 with targeted stimulus measures, but these have few long-term effects and the continued real estate slowdown is keeping a lid on resource demand.

The good news is earnings report this week lifted the S&P 500 to a new all-time high. The DJIA, before Friday, was on the verge of a new high. The sell-off today should not overly concern investors. Finally, as has been the case for much of the year, small caps remain the weak spot. There is reason for optimism with short-term technical indicators turning up, which could lead to another period of outperformance.

ETF Watchlist for July 23, 2014

iShares Russell 2000 (IWM)

While the majority of indexes are at or near their all-time or 52-week highs, small-cap stocks have lagged. The Federal Reserve’s negative comments about valuation last week put even more downward pressure on the small-cap index, but it has since demonstrated some upward momentum. The chart below illustrates the price ratio of IWM to SPDR S&P 500 (SPY) and shows small-caps have underperformed large-caps since March, save only for a month-long rally in June. They are now near their lows in relation to the large cap index. Since the bull market in large-caps remains intact, the underperformance of small-caps may be nearly finished. However, that doesn’t mean they will outperform immediately.

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The semiconductor sector has taken the place of biotechnology as the bull market leader. The chart below shows that, even in its weakest period this year, semiconductor moved sideways, not down. When the broader market has been strong, semiconductors have pushed to new highs. Strong earnings from Intel (INTC) last week provided a further boost to the sector.

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SPDR Energy (XLE)

The energy sector has remained strong even though oil prices have slipped. The chart below shows the price of XLE compared to the price of West Texas Intermediate Crude. Clearly, stock investors remain optimistic in regard to equities. Oil prices have trended upward this year and a stronger economy in the second half should keep demand steady.

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iShares MSCI Emerging Markets (EEM)

EEM cleanly broke above its 2013 high and has made a series of higher lows and higher highs. The major target and resistance area is now above $47.50 per share. A real breakout may not begin until the $50 level is breached as it is post-2008 unadjusted high. The all-time high for EEM, unadjusted for dividends, is closer to $55 per share. A breakout would signal a change in trend for emerging markets. As the bottom chart comparing the price of EEM to SPDR S&P 500 (SPY) shows, emerging markets have been lagging the wider market for years and have yet to make a decisive upward move. However, if the current trend continues to build, a turning point could be evident later this year.

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eem_spyiShares US Technology (IYW)

While energy and utilities sectors were the winners over the first half of 2014, the technology sector is making a strong upward push and could challenge for leadership soon.

Strong earnings reports have boosted shares of some technology firms recently. Google (GOOG), IBM, Microsoft (MSFT) and Intel (INTC) are a few of the names that have performed very well in July. Microsoft and Intel are also experiencing major breakouts from the decade-plus period of technology doldrums. This could be the beginning of a much longer bull market cycle for some of these stocks.

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