Month: October 2015

iShares MSCI Emerging Markets (EEM)

Emerging markets have stalled in the wake of their early October rebound. It could take some time before the outlook turns positive over the long-term for emerging markets from the perspective of the charts, but a short- and even intermediate-term bullish shift is possible. A move above $37 may not hit resistance until it reaches $39, a better than 8 percent move from current levels. A drop of more than 11 percent forces EEM to test its lows. China’s release of economic data this week did nothing to help, with third quarter nominal GDP growth slowing to 6.2 percent before the deflator adjusted real growth to 6.9 percent. The nominal figure was lower than the first and second quarter, signaling that even if China is still growing at a healthy rate, deflation is becoming a bigger problem for companies in the resource and industrial sectors.

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)

Both of the U.S. dollar indexes, USDU and UUP, have been relatively low, but neither collapsed further over the past week. The euro remains in an uptrend, while Canadian and Australian dollars, as well as emerging market currencies, are displaying a trend similar to that of emerging markets. The Chinese yuan, which may be added to the IMF’s SDR currency basket in November, may be responsible for those patterns. Economic frailty could ultimately lead to a weakening of the yuan, but the government may try to prop up the currency until the vote occurs. The U.S. Treasury softened its position on the yuan this week, saying it is below its appropriate valuation, rather than calling it significantly undervalued as they have previously stated.

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

Similar to both emerging market currencies and equities, commodities are testing the gains achieved during the recent rally. Shares of resource producers moved up with the prices of oil, copper and other industrial commodities. The key level is $44 for oil. A break below that would increase the probability that the lows will be tested.

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

HYG broke a downtrend over the past week, which had been in place since the beginning of June. HYG’s ability to hold above its trend line will be vital moving forward. The chart of LQD and the 5-year Treasury yield illustrate that falling interest rates are working in HYG’s favor, but oil prices could be problematic.

iShares US Home Construction (ITB)

This week has been generally light on economic data. However, homebuilder sentiment climbed to a 10-year high this month, while September’s housing starts were the highest in nearly 8 years.

The data helped homebuilders bounce back to the top of their recent trading range. The second chart reflects the price ratio of ITB to SPDR S&P 500 (SPY). ITB underperformed the broader market since its August peak, but has remained in an uptrend since May. This latest news could be the push that sends the sector back into a positive trend over the days and weeks ahead.

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)

The financial sector was the best performer over the past week, despite falling interest rates. Some of the big banks missed earnings or warned on revenue. The big banks that issued warnings have had significant exposure to financial markets, either through client trading or trading on their own accounts. Regional banks are not similarly exposed. The relative price chart of regional banks versus their larger counterparts, illustrated by the comparison of KRE versus KBE, pushed closer to its relative high this year.

Both real estate and utilities continued their rallies due to falling interest rates.

Although Wal-Mart (WMT) disappointed with its earnings last week, retail ETF XRT has held up well thanks to its diversification. The consumer staples ETF from iShares, IYK, is at a new 52-week high.

SPDR Gold Shares (GLD)

Gold outperformed other commodities in recent weeks, though it has recently begun to slip along with oil and other assets. Gold has spent 4 years in a bear market, but has performed better in 2015 thanks to European quantitative easing and China’s decision to devalue the yuan. If currency markets remain calm, gold may struggle. The metal has also hit its 200-day moving average, which provides some resistance as it failed to sustain a move above this level three times over the past two years.

Earnings will dominate the domestic market this week. Morgan Stanley (MS) kicked things off this morning with an earnings miss. This follows weak reports from J.P. Morgan (JPM) and Goldman Sachs (GS) last week. All of these firms blamed trading profits for their misses or negative guidance. We favor regional banks for their lack of exposure to the financial markets. Smaller banks are tied closely to the local economy and benefit directly from rising interest rates, whereas larger financial institutions could see earnings fall due to fluctuations in equity and fixed income markets.

Later this week, General Motors (GM), Yahoo (YHOO), Biogen (BIIB), Google (GOOGL) and Amazon (AMZN) will report, along with Dow components Verizon (VZ), International Business Machines (IBM), Proctor & Gamble (PG), Coca-Cola (KO), 3M (MMM), Boeing (BA), McDonald’s (MCD) and American Express (AXP). The combined market capitalization of these firms comes to nearly $2 trillion and account for more than 10 percent of S&P 500 market capitalization. Some of the big earnings reports to watch are Amazon and McDonald’s. Investors will compare Amazon’s results to Wal-Mart, but also want to see solid growth from the firm’s cloud services division that is becoming a profit center. McDonald’s has been struggling and investors are looking for signs of a turnaround. The fast food giant is now offering all-day breakfast, but recent reports indicate some franchisees are not happy about the move.

Although this is a very light week for economic data domestically, China released a large amount of information Monday. The most significant was the third quarter GDP growth rate, which came in ahead of expectations at 6.9 percent. This number was made possible by a large GDP deflator, which increased the GDP estimate by about 0.7 percent. Producer price deflation is pounding the Chinese economy and without the deflator, nominal GDP only increased 6.2 percent. Headline watchers saw the 6.9 percent figure and came away with a positive view, but other data from September, including investment and industrial production, pointed to a further slowdown. Commodities fell on Monday as a result of the GDP report, with copper down about 2 percent. Oil prices were also down about 2.4 percent in mid-day trading.

Equities were led by the continued rebound in biotechnology and pharmaceutical shares on Monday. While the S&P 500 Index recently hit a two-month high as it retraces the losses made in August, some healthcare subsectors have yet to hit one-month highs. Biogen (BIIB), which reports this week, is 8 percent of iShares Nasdaq Biotechnology (IBB) and 6.3 percent of Fidelity Select Biotechnology (FBIOX). The firm is largely responsible for the lag in biotech funds. It missed second quarter revenue estimates when it reported in July and shares fell 25 percent over the course of a few days. Since then, shares continued to fall and, at one point last week, were down nearly 40 percent from their late June levels. Shares are undervalued to the point where investors who normally avoid the volatile sector may become buyers.  This will certainly help the broader sector.

Equities concluded another positive week following a substantial rally on Thursday. The S&P 500 Index followed yesterday’s advanced 1.49 percent, with an additional gain of 0.46 percent today, setting the stage for an approximate 1.00 percent gain on the week.

The catalyst for the advance was a shift in sentiment regarding interest rates. Articles in Thursday’s Financial Times and the Wall Street Journal argued that the Federal Reserve is likely to wait until 2016 to raise rates. This sparked equity buying by investors, but speculators in the futures market became more hawkish, with March 2016 rate hike odds rising back above 50 percent after a brief drop.

Although J.P. Morgan (JPM) weighed on stocks when it missed revenue estimates on Tuesday and warned on fourth quarter revenues, better reports have emerged over the last few days. Bank of America (BAC) reported strong earnings on Wednesday, aided by the end of litigation costs. Earnings improved from last year’s losses to earnings of 37 cents per share in the third quarter of this year. Litigation cost the bank $6 billion last year, but in the latest quarter, those costs fell to a mere $175 million. One factor impacting revenues is a drop in trading profits; a concern that led us to favor regional banks this year.

Earlier today, General Electric (GE) fueled further optimism with reported earnings of 32 cents per share. That was 1 cent above reports from this time last year and 6 cents above consensus estimates.

Economic data remains solid, but the Atlanta Federal Reserve’s GDP Now model lowered its forecast to 0.9 percent growth for the quarter, due to retail sales ex-autos coming in weaker. The September consumer price index fell 0.2 percent, however, core inflation, which strips out food and energy, increased 0.2 percent last month, well within the Federal Reserve’s target range.

Due to delayed rate hike expectations, the 10-year Treasury yield fell below 2 percent. As a result, rate sensitive sectors such as utilities and real estate rallied. The U.S. dollar weakened as well, but foreign shares didn’t take advantage of the tailwind. iShares MSCI EAFE (EFA) and iShares MSCI Emerging Markets (EEM) both traded sideways during the week.