Click Here to view the ETF Investor Guide Market Perspective:Historic Sell-Off Despite Improving Fundamentals A historic two-week sell-off in stocks ushered in 2016, much to the dismay of many investors. […]
WisdomTree Chinese Yuan (CYB) WisdomTree Bloomberg USD Bullish (USDU) CurrencyShares Euro Trust (FXE) CurrencyShares Swedish Krona (FXS) CurrencyShares Canadian Dollar (FXC) WisdomTree Emerging Market Currency (CEW) WisdomTree Commodity Currency (CCX) PowerShares DB U.S. Dollar Bullish Index (UUP)
Commodity-related currencies slid again this week as oil prices fell below $27 a barrel. The euro and other European currencies excluding the British pound are stable. The USDU chart points to signs of a U.S. dollar bull rally, though the euro continues to prevent a currency market rout for the greenback.
The yen is also gaining strength. FXY is approaching a key resistance level to the upside, or if you are looking at the widely-quoted exchange rate, the USDJPY is approaching the key support level around 116. A break below this level could spark a slide to the 110-yen level. The chart below compares the yen to the S&P 500 Index and illustrates how a further drop in the equity markets would impact the yen. The yen was a cheap funding currency in recent years, not only because of low interest rates, but also due to a rapid drop in the currency’s value. Traders borrow in yen and buy all manner of higher-yielding, higher-return assets. As these assets drop in price, traders reverse their trades and repay yen loans.
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)
The slide in oil prices, to below $27 today, is pulling the entire resource and commodity sector lower. A long-term chart of XLE shows there could be support at the $50 level, where shares traded about 10 years ago and where they bottomed in 2010 before moving higher.
Last week we were looking for $275 for support, but that was broken today. Next support comes at $260. Pharma is testing its 52-week low. A break to a new low would be bearish, but shares performed incredibly well versus the broader market today.
Utilities, consumer staples and healthcare remain the outperformers, with the rest of the market falling largely in unison.
iShares iBoxx High Yield Corporate Bond (HYG) iShares iBoxx Investment Grade Corporate Bond (LQD)
Credit markets are starting to worry about credit risk. Not only did high-yield bonds break to a new 52-week low, but investment grade bonds also saw selling pressure in the past week. The price ratio charts below tell the story. The drop in high yield bonds relative to investment grade bonds (HYG vs LQD), looks very similar to the drop in investment grade bonds versus treasuries. The dip in LQD is much smaller, but it shows how investors are rushing out of quality corporate bonds and into safe haven assets such as treasuries. It is difficult to pinpoint an end to the selling since markets can be highly volatile in these situations, but this behavior suggests the selling is at least reaching a short-term conclusion.
Gold prices rose as investors anticipate central bankers will step in to stop the slide in global financial markets. Gold miner shares are falling with the rest of the market though, and broke key short-term support today.
Relative to large-caps, small-caps stocks are at their cheapest since 2008. Mid-caps are also relatively low priced in the current climate. The Dow continues to hold up relatively well, while the drop so far in the technology-laden Nasdaq is quite small in the long-term scheme of things. Dividend payers are not being sold as quickly as other stocks during this sell-off, which is benefiting dividend funds such as SDY.
Click here to view the Global Momentum Guide for January 18, 2016 Weekly Sector Perspective Oil broke below $30 a barrel during Friday’s pronounced selloff. Small-caps and technology suffered larger losses […]
Equities rallied back to flat for the week by the close on Thursday, but heavy selling resumed today. Although retail sales and bank earnings were solid during the week, investors viewed data though a negative lens as selling picked up on Friday.
Mixed earnings overshadowed the positive reports on a Friday that was dominated by the sell-off. JPMorgan Chase (JPM) reported earnings before Thursday’s bell that beat expectations, lifting the stock 2.2 percent. Wells Fargo (WFC) posted mixed results today; earnings exceeded expectations, but revenues fell short. Citigroup (C) was in line with projections. Shares of Intel (INTC) disappointed investors with a 5 percent slip in after-hours trading that grew to 9 percent in Friday trading.
Analog Devices (ADI) did not report this week, but made headlines by lowering guidance. The high-end of the new range is 20 percent below analyst estimates. ADI is not a key stock for the market, but it is a major supplier to Apple (AAPL) and thus could offer clues in regard to Apple’s future earnings. As the largest component in the S&P 500 Index and over 10 percent of the Nasdaq-100, the direction of Apple shares is critical to the indices.
The oil market continued its descent this week. A barrel of West Texas Intermediate (WTI) crude broke $30 on Tuesday and then rallied approximately 6 percent before giving up all of the gains on Friday and making a decisive break below the $30 level. Below this level we could begin to see significant pressure on Russian and Saudi Arabian government finances.
The Producer Price Index was down 0.2 percent in December and retail sales were off by 0.1 percent. The focus on the headline retail sales figure detracted from the underlying data; sales are down due to falling prices, not falling consumption. This is a subtle difference for retailers, but a big difference for the economy. Sears (SHLD) and Wal-Mart (WMT) joined Macy’s (M) to announce store closures as brick-and-mortar retailers move to the web and succumb to online competition, leading to SPDR Retail (XRT)’s underperformance. Consumer discretionary stocks do not point to weak consumption; they have been outperforming the S&P 500 Index since September 2014 and the trend has intensified since November 2015.
On Wednesday, the Federal Reserve Beige Book showed mixed economic signals. Although there were improvements in the labor market and consumer spending, selling pressure in the energy sector and a strong dollar were portrayed as potentially problematic. That same day, Boston Federal Reserve President Eric Rosengren stated that sluggish U.S. and global growth might lead to a slower pace for the Fed’s rate hikes than originally envisioned. In a speech the next day, St. Louis Fed President James Bullard remarked the following day that the continued decline in inflation may persuade him to change his outlook regarding further tightening. Rosengren and Bullard are voting members on the central bank’s policymaking committee. Odds of a March rate hike fell substantially in the futures market.
Traders likely did not wish to hold shares over the long weekend. The Martin Luther King, Jr. holiday means markets are closed on Monday and China will have two full days of trading before U.S. markets open on Tuesday.
During this time, it is important to remain patient. While the ongoing volatility and recent sell-off have concerned many investors, investing in domestic equities will likely pay off over the coming year. If you have any questions pertaining to the reallocation of your portfolio, please call us at (888) 252-5372.
WisdomTree Chinese Yuan (CYB) WisdomTree Bloomberg USD Bullish (USDU) CurrencyShares Euro Trust (FXE) CurrencyShares Swedish Krona (FXS) CurrencyShares Canadian Dollar (FXC) WisdomTree Emerging Market Currency (CEW) WisdomTree Commodity Currency (CCX) PowerShares DB U.S. Dollar Bullish Index (UUP)
A sharp drop in the offshore yuan (CNH) during the first week of January pulled the onshore yuan (CNY) lower, unnerving investors and triggering volatility throughout most markets. The Australian dollar slid near its 52-week lows over the past week, while the Canadian dollar and some emerging market currencies fell to new lows. The British pound also fell to a new 52-week low versus the dollar. The euro, which is by far the largest weight in the U.S. Dollar Index, has remained relatively stable. UUP tracks using futures contracts, but USDU, uses a broader index that includes emerging markets and has already established a bull rally.
The yen is back near its 52-week highs in response to China’s weakness. The yen is used for the carry trade: traders borrow in yen and invest the money in Japanese stocks or overseas assets. When the market for those assets reverses, traders close their positions. The bottom chart depicts the correlations between the USDJPY exchange rate and the S&P 500. The yen and the S&P 500 Index have both been in a holding pattern since late 2014.
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)
The bear market in commodities is still going strong. Gasoline prices started 2016 with a tumble after inventories increased, subsequently pulling oil prices lower to briefly push West Texas Intermediate Crude below $30 a barrel. Energy stocks broke lower as well, driving past the August 2015 lows and even through 2012 lows. Shares of XLE could find some support here, but a further drop will open up the $45 low set in 2010, a decline of nearly 18 percent from current levels.
Coal, copper and steel all fell to new lows in 2016. China is supposed to slash excess capacity this year, which would go a long way to shoring up global prices. Historically, factories have used the Chinese New Year holiday to implement closings as workers travel home for the one- to two-week holiday. Chinese New Year is February 8 this year.
Biotechnology shares are testing their 52-week lows at the moment. Large-cap IBB is holding at the lows, but two ETFs with exposure to smaller companies, XBI and FBT, have broken those lows. If IBB follows, the next support level is $275 per share, about 5 percent below current levels. In contrast to biotech, the healthcare sector is maintaining its composure, with XLV still above its August lows, due to strength in pharma and medical devices. Healthcare providers, tracked by IHF, have been in a downtrend since June.
Weekly sector performance held no surprises. Energy and materials led the way lower on China weakness and falling commodity prices. A transient shift in rate hike expectations repressed the financial sector and healthcare struggled under sliding Nasdaq and biotech numbers. The overall tech sector, however, performed ahead of many other sectors as large-cap, dividend-paying tech firms outperformed. The defensive consumer staples and utility sectors held up the best.
iShares iBoxx High Yield Corporate Bond (HYG) iShares iBoxx Investment Grade Corporate Bond (LQD)
High-yield bonds have held firm since a 52-week low on December 14, but prices are only 1 percent above those lows. A financial market rebound is likely with stability in high-yield. Investment-grade bond prices have risen against falling interest rates. The 10-year treasury yield is still above 2 percent to continue the past year’s uptrend.
Weakness in currencies such as the Canadian dollar and South African rand, combined with a relatively strong gold price (compared to other commodities) could impact the outlook for overseas gold. These miners pay many expenses in local currency. Other expenses, such as energy, are cheap relative to the price of gold. The key level to watch on GDX is $13. A break below will signal gold is going to follow other commodities lower.
The small-cap Russell 2000 Index is down more than 20 percent from its June 2015 peak. Small-caps have been underperforming the large-cap S&P 500 going back to March 2014. Mid-caps have fared better, but not by much. Dividend shares continued their stretch of outperformance which started shortly before the Federal Reserve announced its rate hike. The Nasdaq slipped on some weakness in Internet shares in 2016, but there’s no sign yet the index has finished outperforming the S&P 500 Index.
Two of the better-performing foreign stock ETFs have been the Ireland and Denmark funds. These funds have seen much bullish action since May 2015, mainly trading sideways, but that’s far better than the Eurozone index which peaked in May. Ireland uses the euro, but Denmark does not, so this is not merely a currency effect.
