Market Perspective for October 30, 2015

Friday closes out the month of October, which has been a good one for equities. The S&P 500 Index is headed for a gain of nearly 9 percent, which is the best October for stocks in 4 years. It won’t make the top ten list, but this is one of the largest monthly advances in history.

The market absorbed a wide range of positive economic and financial news and marched higher on the week, despite a slow start as reaction to Apple beating both its top and bottom line expectations was tepid. The NASDAQ was up less than 1 percent for the week in Friday trading as a result, however, subsectors did much better. The pharmaceutical sector, as measured by the SPDR S&P Pharmaceutical ETF (XPH), gained close to 4 percent for the week while the biotechnology sector rose nearly 3 percent. Earnings announcements by industry leaders Merck (MRK), Pfizer (PFE) and Biogen (BIIB) helped lift the sectors. Pfizer also revealed that it was in merger talks with Allergen PLC (AGN). Oil and gas leaders Chevron (CVX) and Exxon Mobil (XOM) beat expectations, which will help lift the S&P 500’s earnings growth this quarter, but ConocoPhillips (COP) reported a third quarter loss. Conoco indicated that it would lower its cost structure in the face of continued weakness in crude oil prices, while Chevron said it will lay off about 7,000 workers.

In economic news, the Federal Reserve issued a statement that many market watchers believe demonstrates a more hawkish stance on the part of the central bank. The odds that the Fed will raise interest rates at its December meeting instead of waiting until 2016 have risen above 50 percent. This news sent financials sharply higher on the day, with SPDR KBW Regional Bank (KBW) rising nearly 4 percent.

Although the S&P/Case-Schiller House Price Index showed a 5.1 percent increase versus last year, the housing industry saw two weaker reports. New home sales dropped 11.5 percent in September from a month earlier; an increase was expected. A 2.3 percent drop in pending sales in September also caught market analysts off guard; they were expecting a slight increase there as well. Third quarter GDP missed consensus expectations of 1.8 percent growth, but the first estimate of 1.5 percent growth did come in ahead of the Atlanta Fed’s GDP Now model forecast of 1.1 percent. The number of Americans filing for initial jobless benefits rose slightly this week. Consumer sentiment remains positive in October.

While Mario Draghi insinuated last week that the European Central Bank might engage in further quantitative easing, the Bank of Japan has indicated that it may not increase its current asset purchase program. This sent the yen higher on Friday.  In the face of a stronger U.S. dollar, iShares MSCI EAFE (EFA) and the iShares MSCI Emerging Market (EEM) ETFs were both down on the week.

ETF Watchlist for October 28, 2015

No one expected the Federal Reserve to raise rates at the October meeting, and few expect a hike in December, but the Fed’s statement today removed a reference to global economic weakness. Speculators and forecasters continue to focus on the March and April 2016 meetings as the most likely candidates for an increase. The Fed’s removal of that specific language pushed the odds of a December rate hike to 47 percent, while the odds of a January rate hike spiked to 55 percent.

Gold and oil were up sharply early Wednesday as traders anticipated the Fed would signal no rate hikes until 2016, in part due to slower-than-expected growth in the third quarter. Oil held its gains following the Fed’s statement, but gold dropped. The one sector that stood out in the stock market was financials, which rallied as the broader market fell on the news.

iShares MSCI Emerging Markets (EEM)

The concerns surrounding emerging markets has faded, despite remaining in a tight trading range. Any fluctuation would likely be followed by commodities and foreign currencies. Although commodities and resource producers rebounded on Wednesday, emerging markets saw a much smaller move. This gap should close over the week ahead.

WisdomTree Chinese Yuan (CYB)
WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares Japanese Yen (FXY)
CurrencyShares Australian Dollar (FXA)
CurrencyShares Canadian Dollar (FXC)
WisdomTree Emerging Market Currency (CEW)
WisdomTree Commodity Currency (CCX)
PowerShares DB U.S. Dollar Bullish Index (UUP)
WisdomTree Japan Hedged Equity (DXJ)
WisdomTree Europe Hedged Equity (HEDJ)

The U.S. dollar rallied strongly last week against the euro, following comments from European Central Bank (ECB) President Mario Draghi that raised expectations for more quantitative easing in December. The trend continued as the People’s Bank of China eased its monetary policy. Today, some of those gains were given back as two ECB governors warned they didn’t believe more easing was imminent.

Last week’s rally was due for a pullback this week, but thus far the U.S. dollar has held most of its gains. Both UUP and USDU are within striking distance of new highs, with USDU being closest thanks to weakness in emerging market currencies. Most notable on Wednesday is a drop in commodity currencies, tracked by CCX, on a day when oil was up nicely.

The rally in the greenback also contributed to a revival of currency hedged funds.











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 prices jumped more than 5 percent on Wednesday, following more than two weeks of near uninterrupted losses. A decline in oil inventories at Cushing, Oklahoma was positive for the commodity, but the rally began before the news came out. Oil-related equities followed crude higher, though the gains were only half of oil’s gain.

Natural gas stocks have fared worse of late and traded close to the 52-week low, while the price of natural gas plunged to a new 52-week low.

Coal, copper and steel are worth paying attention to over the days ahead. On Wednesday the head of the Chinese Steel Association said demand is falling with “unprecedented speed,” an alarming statement considering how much demand has already declined. Chinese steel mills produce half of the world’s output and they have been dumping excess steel on the global market as demand at home cools. Protectionist policies may soon emerge to defend various national steel industries, but until then, falling demand in China could pressure global prices. Iron ore prices, a key ingredient for steel, fell 3 percent in China on Wednesday.








iShares US Home Construction (ITB)

Last week we examined ITB following the release of strong housing data. Instead of rallying, however, shares remained in their trading range. The continued delay of rate hike expectations is likely playing a role. We continue to expect a rate hike to raise overall confidence in the economy and should push homebuyers off the sidelines once the prospect of lower interest rates is eliminated.


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)

Energy and utilities were the only two sectors to fall last week. Technology and healthcare, which spent much of 2015 leading the market higher, resumed their ascent. Strong earnings from Amazon (AMZN), Google (GOOG), Microsoft (MSFT) and Apple (AAPL) have aided the tech sector’s advance. Biotechnology and pharmaceuticals had been weighing heavily on the healthcare sector recently, but both moved sharply higher over the past few days.

Regional banks continued to beat their larger bank counterparts last week and the price ratio chart of SPDR KBW Regional Banking (KRE) versus SPDR KBW Bank (KBE) broke out to a new 52-week high. Financials remain below their 52-week highs in part due to the Fed’s interest rate decisions, but there is underlying strength in regional banks. The relative price ratio of KRE to KBE is approaching a 5-year high.

Consumer stocks have been doing very well of late, led by consumer staples ETFs that have recently set new 52-week highs. Yesterday, Walgreens (WAG) announced it would buy Rite Aid (RAD), delivering another shot in the arm to the retail sector. PowerShares Dynamic Leisure & Entertainment (PEJ) is near its 52-week high.







SPDR Gold Shares (GLD)

With the ECB talking about quantitative easing and the Chinese central bank cutting both interest rates and reserve requirements last week, gold prices should have seen a rally, but instead consolidated previous gains. The rally in gold since August is partly the result of fading rate hike expectations, but decisions at foreign central banks are having an impact. Sweden’s Riksbank also announced it would increase quantitative easing. The Riksbank decided to hold interest rates steady at negative 0.35 percent.

In the near term, gold bulls need to see the metal push above $118, which requires a gain of nearly 5 percent. Shares of GLD have gained 5 percent in October already, but every rally over the past 5 years has failed. The Fed’s statement today, putting a December rate hike back on the table in the minds’ of investors, was a blow to the bulls, but with most central banks easing, the current rally still has support.

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

Earlier this year it appeared value was ready for a rebound versus growth, after years of underperformance. Then the bottom dropped out of the oil market and the Federal Reserve pushed back its rate hike plans. Last week’s earnings beats by several Internet and technology companies exacerbated the trend.

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)

Mid- and small-caps underperformed last week, continuing the pattern we have seen over the past month. The Nasdaq has been beating the other major indexes by a wide margin this year and it added to its lead. The Dow has improved since August and remains in a relative uptrend versus the S&P 500 Index. Calm in the bond market has dividend stocks, represented by SDY, holding steady versus SPY.

As for SPY itself, the ETF is right back to the middle of the six month trading range that was in place from February through August. Over the next week or two, SPY and the underlying S&P 500 Index could push to a new all-time high, leading a new bullish breakout for the market.




Market Perspective for October 26, 2015

The market is still in the midst of earnings season as investors eagerly await Tuesday’s numbers from Apple (AAPL) after stellar performances from Amazon (AMZN) and Google (GOOG). Investor expectations are running high for the smartphone giant with the holiday season approaching. Despite weaker stock performance over the past few months compared to other technology bellwethers, good numbers from Apple could propel the NASDAQ to a new all-time high.

The health of the pharmaceutical sector will be reflected in the earnings of Merck (MRK) and Pfizer (PFE), which are both scheduled to release results tomorrow. Investors will be on the lookout for reports about the companies’ late-stage drug trials and for insight into their future prospects. The end of the week will reveal the state of the energy space when integrated giants Exxon Mobil (XOM) and Chevron (CVX) report earnings on Friday. Their numbers will reflect the impact of falling oil prices, cost-cutting measures, worldwide energy demand and current inventory levels. Energy is what continues to drive the S&P 500 Index to speculate an earnings decline of 3.8 percent this quarter, although strong earnings thus far have reduced this forecast from 5.1 at the start of earnings season.

Economic news this week includes a two-day meeting of the Federal Reserve. Although expectations of a rate hike are low, the policy guidance could provide insight on the Fed’s intentions going forward. Investors will scrutinize any announcements for information regarding interest rates or clues that may suggest a hike in December, as well as their reaction to the quantitative easing announcement from the European Central Bank (ECB) this past Thursday. After cutting rates six times in less than a year, including this past Friday, the People’s Bank of China (PBoC) released a statement over the weekend saying that they anticipate annual GDP growth to remain around 6 percent for the next 3 to 5 years. PBoC Vice-governor Yi Gang insinuated this might be the new normal level for Chinese growth. The rate cut and a reduction in reserve requirements are attempts to jumpstart the economy that has been a drag on world markets of late.

The state of the U.S. economy will be revealed with Tuesday’s reports on Durable Goods Orders, Thursday’s third quarter GDP number, as well as weekly unemployment claims, Friday’s consumer sentiment index and Chicago Purchasing Managers’ Index. Most of these reports are expected to show improvement. Key housing reports to be released include New Home Sales on Monday, the S&P/Case-Schiller House Price Index on Tuesday and the Pending Home Sales on Thursday. Last week, housing data hit highs unseen since 2008.

Good news from tech giants Google and Microsoft (MSFT), as well as consumer favorites Amazon and McDonald’s (MCD), plus a PBoC rate cut, helped propel the markets higher last week. The week has started off optimistically and upward momentum should continue with additional positive earnings news and economic reports.

Market Perspective for October 24, 2015

The equity markets turned in another positive week boosted by encouraging earnings, currency and economic news. On Thursday, the S&P 500 rose 1.66 percent and on Friday, the NASDAQ increased 2.27 percent. For the week, the NASDAQ led with a 2.97 percent gain, followed by a 2.50 percent advance in the Dow Jones Industrial Average. The S&P 500 increased 2.07 percent, while Russell 2000 Index saw a modest 0.29 percent gain.

Although high-flying Tesla received some bad press on Tuesday that sent the stock tumbling, the market was more interested in the stellar numbers turned in by Alphabet (GOOG), Amazon (AMZN), McDonald’s (MCD) and Microsoft (MSFT). Stocks were also buoyed when shares of Caterpillar rebounded nicely after it slashed its outlook for 2016. Alphabet, parent of Google, reported large gains in mobile phone searches, tight fiscal controls and the company’s first stock buyback. Shares rose 9 percent afterhours. Amazon posted a surprising per share profit, which sent the stock sharply higher. The cash raining down from its cloud business division lifted Microsoft (MSFT). All-day breakfast is accelerating foot traffic, which should be a good sign for McDonald’s going forward after the company posted strong third quarter earnings.

On the heels of a 25 billion yuan injection by the PBOC via a seven-day reverse repo, on Thursday ECB President Mario Draghi hinted that another round of quantitative easing might be in the cards for December. He spoke about stubbornly low inflation, emerging market weakness and lackluster growth in the euro zone. The euro slumped to 3-week lows against the dollar. On Friday, the People’s Bank of China cut interest rates, sending the dollar higher yet again. While the iShares MSCI EAFE (EFA) rose on the week with optimism about more quantitative easing in Europe, the iShares Emerging Markets ETF (EEM) was relatively flat.

U.S. Treasury yields slipped to their lowest level in a week, but a strong flash manufacturing PMI on Friday pushed rates a little higher as the needle moved back towards rate hikes.

In economic news, existing home sales rose 4.7 percent to the second highest level in 8 years. The rate on a 30-year mortgage fell to 3.79 percent. The National Association of Homebuilders reported that builder confidence is the strongest since 2005. The Labor Department reported that claims for initial unemployment benefits were the lowest level in 40 years. Expectations remain that the Federal Reserve will not raise rates during its next meeting set for late October, but the robust PMI number raised the odds of a December hike. All of this strong news provided further momentum to propel stocks higher for the week.