Market Perspective for August 29, 2014

Stocks finished another solid week thanks to strong economic data and buyout activity. The S&P 500 Index gained 0.75 percent on the week and the Nasdaq rallied 0.92 percent. The Dow advanced 0.57 percent, while the Russell 2000 added 1.19 percent. Even more encouraging was that the S&P 500 had its best month of August since 2000, gaining 3.8 percent. Both the Nasdaq and Russell 2000 performed even better, as each advanced over 4 percent for the month. The Dow trailed slightly, returning 3.2 percent.

The significant news for the week was the surprisingly strong revision of second quarter GDP. Economists expected the number to fall slightly, down from an initial 4.0 percent to 3.9 percent. Instead, GDP came in higher at 4.2 percent, due to increased business investment. These capital infusions are needed to build factories and buy equipment that will provide for higher productivity and a larger economy in the future.

The higher GDP number followed a big surprise in durable goods orders, which jumped to 22.6 percent growth in July, blowing away forecasts that were mostly below 10 percent. The jump came thanks to a large number of orders for Boeing jets. It was the largest one month increase going back more than 20 years.

It was also announced that Intermune (ITMN) will be taken over by Roche (RHHBY). The news pushed up shares of ITMN on Monday and propelled some biotechnology sector funds to new highs for the year.

Bond investors were not frightened by the strong economic data, and yields fell. The 10-year treasury closed at its lowest yield for year. Similarly, gold prices reacted to the strong economic data by climbing higher. One factor behind the move in both assets may be currency markets. The euro remains weak and is now oversold. German bond yields are also negative out to three years as investors weigh the continent’s economic weakness along with the European Central Bank’s refusal, thus far, to do more. Low German bond yields pull U.S. yields lower, while a weaker euro pushes up gold in euros and could cause enough buying to raise the price in dollar terms as well.

Also helping U.S. bonds and precious metals are the geopolitical events in Ukraine. The Ukrainian government on Thursday claimed Russian forces had entered the country. Financial markets didn’t react much to the news, but the strength in bonds and precious metals could also be a result of safe haven buying in light of current risk in Europe.

ETF Watchlist for August 27, 2014

First Trust NYSE Arca Biotechnology (FBT)
iShares Nasdaq Biotechnology (IBB)

It was questionable whether biotechnology stocks would recover from their major sell-off earlier this spring and return to market leadership. The odds of a rebound were good as long as the market stayed in a bullish trend, but many sectors give up their leadership following a major correction. Biotech has now fully recovered from its losses and is challenging again for market leadership. Leading the way is FBT, which is already one of the strongest ETFs in the market. The takeover of Intermune (ITMN) boosted FBT to a new 52-week high this week. IBB is close behind.

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Global X Copper Miners (COPX)

COPX has tracked with copper prices since inception. Following the recent small corrective move, copper and COPX remain in an uptrend that goes back to April lows in the case of copper and to July 2013 lows in the case of COPX. Copper is starting to show some weakness though, failing to make a new high since July. Chinese lending for August is off to a slow start, so that could be weighing on the copper market.

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Market Vectors Gold Miners (GDX)

To contrast the chart above, which shows COPX moving in lockstep with copper, below is a look at gold miners and the price of gold. The two moved in lockstep over the past year, but a look farther back shows gold and mining shares, while being highly correlated, do not move as tightly as copper and copper mining shares. Gold and gold mining shares are in a similar position to copper though, with a series of higher lows in place.

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iShares Barclays 20+ Year Treasury (TLT)

Bonds have quietly staged a strong rally in 2014. TLT is up 17 percent since the start of the year (including dividends) and is looking like it might test its all-time high from the summer of 2012. What’s interesting is the stair step gain in TLT, it appears to be following a straight line ever since the Fed began its taper. With about eight more weeks to go, TLT will be a fund to keep an eye on.

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CurrencyShares Euro Trust (FXE)

One reason why TLT is rallying is that U.S. bond yields are being pulled lower by their European counterparts. German bonds have a negative yield out to three years now as more economists are beginning to believe that Europe is in a depression, not a recession. This has talk of quantitative easing heating up, something European Central Bank President Draghi has mentioned as a possibility, but with no firm commitment. The net result is a slide in the euro as traders anticipate a surprise move by the ECB.

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SPDR Consumer Discretionary (XLY)

XLY and XRT held their gains over the past week and pushed to new 52-week highs. This week still has a few retailers reporting earnings, including Best Buy (BBY), which missed analyst estimates when it reported yesterday and warned of a weak holiday season. This sent the stock down about 6 percent. Even though that firm missed, the general trend for retailers has been positive. Retail, along with the larger consumer discretionary sector, has underperformed in 2014. That this lagging sector is trading at 52-week highs tells us about the overall strength of the market this year.

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Market Perspective for August 25, 2014

Stocks pushed higher last week despite the Federal Reserve sounding slightly more hawkish in its minutes, thanks in part to very strong economic data such as the much stronger than expected manufacturing PMI. The rally has continued into mid-day trading today, as the S&P 500 surpassed 2,000. The Dow Jones Industrial Average and the Nasdaq were also up through the early afternoon.

There won’t be as much economic news out this week, with some housing and consumer spending data making up the bulk of reports. Durable goods orders are projected to rise 6.9 percent in July, a significant increase, but looks justified based on the PMI numbers. Attention will also be paid to the second quarter GDP growth revision. The government puts out three estimates of GDP, each one spaced a month apart. The estimate last month was 4.0 percent and economists have lowered their forecasts slightly to 3.9 percent growth.

This week we’ll also get some updates on the situation in the eurozone and in Japan. Europe will report consumer confidence, business climate, industrial sentiment, along with private loans on Thursday. The same day, Japan will announce inflation and retail sales data, the latter of which will be closely watched given the major impact of the recent sale tax hike.

The Nasdaq and S&P 500 Index both hit new 52-week highs and look to add to their gains this week. The Dow Jones Industrial Average could push to a new high over the coming days. The Russell 2000 has kept pace with the S&P 500 Index for the past month, neither meaningfully underperforming nor outperforming. The Dow Transportation Index is also close to its high for the year after recovering from its late July sell-off. Markets are doing well in August, but a new high in both the Industrials and the Transports would signal a very clear bullish signal.

Trading will be light this week and should get lighter as we head into the Labor Day weekend. Volatility could increase slightly, but most likely the markets will be calm due to traders taking vacations.

Earnings: Some retailers are still reporting, among them Abercrombie & Fitch (ANF), Best Buy (BBY), Tiffany (TIF) and Dollar General (DG). Solar panel makers Trina (ISL) and Yingli (YGE), plus gun maker Smith & Wesson (SWHC) will also release earnings this week.

Market Perspective for August 22, 2014

The S&P 500 Index pushed on to a new all-time high, closing up 1.70 percent for the week. The Dow Industrial gained 2.03 percent and is close to hitting a new all-time high as well. The Nasdaq rallied 1.64 percent, while the Russell 2000 1.63 percent.  With the exception of the Russell 2000, this is now the third straight positive week for the major indexes.

On Wednesday the Federal Reserve released the minutes of its prior meeting. The minutes showed some members of the Federal Reserve Board want to increase interest rates sooner rather than later. These members see a strong economy and firming inflation as reasons to be more aggressive with monetary policy. Investors mainly ignored the minutes, including bond investors. Interest rates did increase slightly for the week, but the move looks like a regular short-term reversal following a previous drop in rates.

Janet Yellen’s speech at Jackson Hole today also failed to stir the markets. She said the Fed intends to exit QE in October and that rates could rise based on economic fundamentals. She leaned towards the dovish side with her focus on the slack labor market, which is keeping a lid on inflation, saying that the Committee judged that underutilization of labor resources still remains significant.”

One important data point favoring the hawks at the Federal Reserve is strong manufacturing data. The flash PMI for August hit 58, well above the July number of 55.8 and the highest reading since April 2010. Any number over 50 signals economic expansion in the manufacturing sector and PMI has been climbing all year. Manufacturing is a leading indicator for the economy because much of manufacturing takes place at the earlier stages of production, such as making the components for other goods. Changes in the manufacturing sector show up months later in the broader economy.

Strong earnings were again a positive for the markets. Home Depot (HD) shares moved sharply higher on Wednesday following a beat of earnings estimates and higher guidance. Lowe’s (LOW) followed up with a strong earnings report on Thursday, but it lowered guidance. Shares of Lowe’s were up for the week though, as it followed Home Depot higher on Wednesday. Overall, the retail sector was strong on the week, as SPDR Retail (XRT) saw its best week in nearly two months.

Shares of Hewlett-Packard (HPQ) gained 5 percent on Thursday following a solid earnings report that delivered earnings in line with estimates and higher than expected revenues. The technology sector also got a boost from Ebay (EBAY), which gained just shy of 5 percent when the firm announced it’s considering a spin-off of PayPal.

In other news, Argentina decided to end its battle with holdout bondholders in New York by forcing them to take new bonds issued in Buenos Aries. China’s flash PMI for August slumped to just above 50, renewing concerns about the slowing economy.