Month: April 2016

European markets posted stronger gains, while U.S. indexes were up slightly for the week. The Dow Jones crossed 18,000 and the S&P 500 surpassed 2,100, though the indexes were unable to hold those gains following technology earnings misses released Thursday night. European stocks held most of their advances despite unchanged rates, while Japanese shares rallied on stimulus expectations. Oil prices firmed during the week to support the commodity market.

Domestic stocks were lifted by energy and financials firms. Shares of Goldman Sachs (GS) and Morgan Stanley (MS) advanced on better-than-expected earnings, while shares of American Express (AXP) rose as the company reported quarterly EPS and revenues that beat consensus estimates. AXP reported a widening client base and increased transactions in the prior quarter.

Regional banks also performed well following strong earnings from BB&T Corp (BBT), Fifth Third (FITB) and Citizens Financial Group (CFG), the latter of which also hiked its dividend. In a sign of the sector’s strength, even a miss at PNC Financial (PNC) failed to derail the stock, with shares headed for a 4 percent gain on the week. SPDR S&P Regional Banking (KRE) held a 3.7 percent gain in late Friday trading. The broader Financial Select Sector SPDR ETF (XLF) gained slightly over 2 percent.

The Energy Select Sector SPDR exchange-traded fund (XLE) rose 5 percent on the week even without an agreement to freeze production output at the OPEC meeting in Doha.

On Monday, International Business Machines (IBM) beat earnings and revenue expectations. The company’s forward guidance left investors concerned as Big Blue sheds older technologies and pushes further into the competitive cloud computing space. Shares of IBM were down on the week. Intel Corp (INTC) reported earnings at the lower range of consensus estimates. The company will be cutting approximately 12,000 jobs from its global workforce. Shares of INTC were unchanged on the week. Netflix (NFLX) reported weaker-than-expected guidance on Monday, but the broader Internet sector shook off the news by midweek. Technology funds held firm until after the bell on Thursday, when earnings misses from Alphabet (GOOG) and Microsoft (MSFT) put pressure on the sector.

The National Association of Home Builders survey came in at 58 for the third consecutive month, indicating cautious optimism. Although U.S. housing starts fell to their lowest level since October, existing home sales climbed more than 5 percent as buyers took advantage of a strong labor market and near-record low interest rates.

On Thursday, the Philly Fed manufacturing survey missed expectations with a reading of -1.6 instead of the consensus estimate of 10, even further below last month’s 12.4 reading. The Markit flash PMI also came in below expectations on Friday, at 50.8, but still shows expansion. Initial weekly unemployment claims fell even more than expected and remains at multi-decade lows.

This week was marked by rotation into value sectors. Growth, which is heavily invested in technology, has led almost the entirety of this bull market, but value shares are more reliant on financials and have recently gained ground. Consumer staples and utilities led into late March prior to an energy rally, followed by healthcare and now financials. SPDR S&P 500 Growth (SPYG) is down about 0.9 percent this week due to the drag from technology, while the value fund SPYV, which counts financials as its largest sector, is up about 1.6 percent. This move occurred even though utilities and consumer staples fell with weaker-than-expected Coca-Cola (KO) revenue that sent shares down as much as 8 percent post-earnings before rebounding.

Rotation into healthcare also continued this week. UnitedHealth Group (UNH) delivered solid earnings and powered the rally with its decision to quit the Affordable Care Act in most states next year. Shares of iShares US Healthcare Providers (IHF) climbed 3 percent on the week. iShares US Medical Devices (IHI) increased about 1 percent, iShares Nasdaq Biotech (IBB) rallied about 2 percent and SPDR Pharma (XPH) advanced 4 percent. The move by UNH is likely to put the spotlight on the healthcare sector as the presidential campaign heats up.

iShares US Medical Devices (IHI)
iShares US Health Providers (IHF)
iShares Nasdaq Biotechnology (IBB)
SPDR Pharmaceuticals (XPH)

UnitedHealth Group (UNH) reported strong earnings and revenue growth in the first quarter. UNH also announced this week it will no longer offer policies on government exchanges in most states, a move that will save the company as much as $1 billion.

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)

The S&P 500 Total Return Index, which includes dividends, broke to a new all-time high last week, reflected in SPY. A move to a new high on the price index will bring short-covering and also end the trading range seen over the past two years. The S&P 500 needs to clear 2125 in order to reach a new high. The DIA and the Dow Industrial Average show a similar breakout in the total return index, but not the price index.

SPDR S&P Dividend (SDY), a fund we favor, continues to track with the S&P 500 Index.

WisdomTree Bloomberg USD Bullish (USDU)
CurrencyShares Euro Trust (FXE)
CurrencyShares British Pound (FXB)
CurrencyShares Canadian Dollar (FXC)
CurrencyShares Japanese Yen (FXY)
WisdomTree Emerging Market Currency (CEW)

The U.S. dollar remains in its trading range and will likely bounce off the low of this range due to central bank policy shifts. The Bank of Japan may increase asset purchases at the next meeting and yen strength has been a major factor in U.S. dollar weakness the past few weeks.

Emerging market currencies have stayed strong with rising oil prices.

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

OPEC did not cut production and oil prices initially fell on Monday, but the market remains structurally bullish. The current move may also be a short-squeeze, since some traders bought protection ahead of the oil meeting. Oil flirted with $45 a barrel today, and a move above opens up a run towards $50 as shorts are taken out. On the downside, support is at $40 and $35 a barrel.

Steel has been the most interesting commodity sector. Protectionist tariffs against China have lifted the price of steel in the U.S. and other countries, which is good for domestic steelmakers. China has responded by increasing its production even further, which is stirring up talk of more tariffs.

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)
SPDR Retail (XRT)

Netflix (NFLX) and International Business Machines (IBM) tumbled after reporting earnings this week, causing the technology sector to lag the overall market. The spike in oil over the past three days has led to a strong rally in energy and material shares. Whether this commodity rally lasts may rest on China: the country announced it is shifting monetary policy following an alarming rise in debt and home prices over the past month.

The homebuilding sector has plodded along steadily over the past few years and strong earnings reports in March increased optimism for the sector. New building permits were below expectations in March, while existing home sales were higher than expected.

The industrial sector is one to keep an eye on in the next week as it approaches a new all-time high. It would join utilities, consumer staples and telecom in trading at new all-time highs in 2016.

Investment banks, and mega banks with investment banking divisions have reported lower earnings growth due to weakness in the trading and investment banking divisions. However, the banks reported strong lending growth, which is positive for the overall banking sector. IAI has underperformed the broader financial sector represented by XLF, which in turn has underperformed the regional banking sector covered by KRE.

(Sectors chart)

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

LQD only rested for a few days before resuming its steep ascent. Buying of investment grade corporate bonds has been taking place despite the rise in treasury yields, which suggests improving credit conditions.

Oil prices will weigh on Fed officials; if oil climbs to $50 a barrel and stays there, headline inflation which is running near 0 percent annually will quickly converge with core inflation, which is running above 2 percent, well into the Fed’s target range.

SPDR Gold Shares (GLD)
Market Vectors Gold Miners (GDX)

On Tuesday, bullish traders in the silver market squeezed the bears, leading to triple normal trading volume and a bullish breakout in silver. The vertical move in silver this month is unsustainable, but it may not top out until around $18 an ounce or about $17.50 for SLV. Gold mining shares have rallied along with the silver miners, but gold itself has been relatively muted compared to silver.

First Trust Dow Jones Internet (FDN)
PowerShares Nasdaq Internet (PNQI)

Internet stock performance mirrored that of the broader S&P 500 Index. Amazon’s (AMZN) decision to take on Netflix (NFLX) in streaming dealt a large blow to Netflix and resulted in a net negative for Internet ETFs. Netflix also reported earnings this week, and weaker-than-expected guidance led to a decline in the stock.

The Dow Jones Industrial Average posted its best returns in over a month and all major averages posted gains of 1.6 percent or better. Strong earnings reports and positive economic news boosted the markets.

The chief economic driver coming into the week is the OPEC meeting in Doha, Qatar and its impact on energy prices. Word leaked on Sunday that no deal was coming. An agreement to freeze production at January 2016 levels, which are peak production levels for key nations such as Saudi Arabia, would not have done much to alleviate oversupply in the market, but it would have likely ended the battle for market share. Oil prices immediately fell 5 percent on the news before recovering.

The National Association of Home Builders survey is due out Monday, while housing starts and existing home sales for March are scheduled to be released Tuesday and Wednesday. The builder survey and existing sales are both expected to show an increase. The consensus is for a slight decline in housing starts. The Philly Fed manufacturing survey and the weekly initial unemployment claims report, which is expected to rise slightly from last week’s multi-decade low, will both be available on Thursday. The European Central Bank is expected to hold interest rates unchanged at its meeting Thursday.

This is a big week as earnings season gets into full swing. On Monday, International Business Machines (IBM) reported earnings per share of $2.35, exceeding estimates of $2.09 on revenues of $18.29 billion. Analysts will be paying particular attention to IBM’s medical services partnership with Apple. Morgan Stanley (MS) is scheduled to report earnings per share of $0.46 on expected revenues of $7.97 billion. Traders will be interested in the impact that volatility in global banking market has had on the company’s earnings. Goldman Sachs (GS) is scheduled to report EPS of $2.45 on revenues of $6.76 billion. While underperforming the Dow average year-to-date, Goldman rallied 7 percent last week along with the overall financial sector.

Intel (INTC) is expected to report EPS of $0.48 on revenues of $13.88 billion. On Wednesday, American Express (AXP) is due to report EPS of $1.35 and revenues of $8.08 billion. AXP and GS are the two worst performing Dow components in 2016, so good numbers this week could be a boost for the Dow, particularly GS since it is the second largest component. On Thursday, Microsoft (MSFT) and Visa (V) are scheduled to report. While consensus estimates for MSFT are for EPS of $0.64 on revenues of $22.11 billion, investors expect Visa to report EPS of $0.67 and revenues of $3.6 billion.

Other blue chips or widely held shares reporting include: Netflix (NFLX), Pepsi (PEP), Harley-Davidson (HDI), Johnson & Johnson (JNJ), Philip Morris International (PM), Yahoo (YHOO), UnitedHealth Group (UNH), Abbott Labs (ABT), Coca-Cola (KO), Yum Brands (YUM), Alphabet (GOOG), Biogen (BIIB), General Motors (GM), Schlumberger (SLB), Starbucks (SBUX), Verizon (VZ) and McDonald’s (MCD).

Financials reporting this week include M&T Bank (MBT), Pinnacle Financial Partners (PNFP), Comeria (CMA), Discover Financial Services (DFS), Northern Trust (NTRS), BB&T Corporation (BBT), Citizens Financial Group (CFG), Fifth Third Bancorp (FITB) and Synchrony (SYF).

The transportation and industrial sectors will also see several key reports including Union Pacific (UNP), Norfolk Southern (NSC), Southwest Airlines (LUV) and American Airlines (AAL). Industrials reporting include Johnson Controls (JCI), Honeywell (HON), Illinois Tool Works (ITW), Caterpillar (CAT) and General Electric (GE).

Buoyed by energy and financial stocks, the major indices reached new 2016 highs this week. Part of the move in energy was driven by traders positioning ahead of OPEC’s meeting in Doha, Qatar on April 17. There’s high hopes that an agreement to freeze production will be reached.

JPMorgan Chase (JPM) rose more than 4 percent after beating earnings estimates by 7 percent. Although Bank of America (BAC) reported an 18 percent decline in trading profit, management indicated a strong demand for consumer and commercial loans in the United States. Bank of America’s earnings reinforce our view that regional banks will perform well this year. Unlike large banks with trading and investment banking divisions, the regional banks get the bulk of their profits from lending. Wells Fargo (WFC) reported a 7 percent slide in quarterly profits as the bank increased its loan reserves. Shares were up more than 3.5 percent on the week. In addition to solid earnings, some lingering concern over oil-related loans was alleviated by the rising price of crude this week.

Shares of Alcoa (AA) gained nearly 8 percent on the week despite a poor earnings report as investors bet on a recovery in China and commodity prices. Shares of Delta Air Lines (DAL) rallied as much 4 percent during the week after beating estimates by 2 cents, nearly tripling earnings from the year ago quarter, but shares gave up some of those gains on Friday. Railroad CSX Corp (CSX) met earnings estimates, but missed on revenue. The decline in energy prices has weighed on CSX and other rail transport companies, but the drop in coal shipments as part of the government’s “war on coal” has stung the most. Coal producer Peabody (BTU) declared bankruptcy this week, joining several other major coal producers that have filed for chapter 11 bankruptcy this year.

Investors sifted through a wide range of mixed economic reports this week. China reported several positive data points for March. Reflecting higher food prices, the Chinese Consumer Price Index (CPI) rose 2.3 percent on a year-over-year basis. The Chinese Producer Price Index (PPI) declined for the 49th consecutive month, but the decline narrowed and prices increased from February to March. The country’s exports increased 11 percent, higher than expected. GDP growth in the first quarter was reportedly 6.7 percent. Fixed asset investment, industrial production and retail sales also were higher than expected.

A decline in auto sales lowered U. S. retail sales by 0.3 percent in March. Consensus expectations were for a 0.1 percent increase from the previous month. Ex-auto, retail sales increased 0.1 percent, which reflects stronger-than-expected non-auto retail sales. The domestic Producer Price Index (PPI) unexpectedly fell 0.1 percent. Estimates were for a 0.3 percent increase due to higher energy costs, but this was more than offset by a decline in the cost of services. Along with a pickup in wage growth, the Federal Reserve Beige Book released Wednesday indicated continued economic expansion. Friday’s Empire Index, which covers economic activity in the New York Fed’s region, was much higher than expected. Weekly unemployment claims fell to their lowest level since 1973 reinforcing the ongoing strength in the domestic job market.

Several Federal Reserve officials delivered prepared remarks during the week. They expressed optimism regarding the fundamentals of the U.S. economy. Economic strength is leading to higher consumer price inflation, but prices are being tempered by weakness overseas. Investors still expect the Fed to raise rates later this year, and officials gave no reason to change that view this week. During an interview Wednesday, Chair Janet Yellen reiterated that the Fed is unlikely to make any sudden or dramatic moves in the near future due to the uncertain global economic environment. The International Monetary Fund (IMF) cut its world growth forecast this past Tuesday and Singapore’s central bank surprised markets with an easing in monetary policy, citing the weak economy. The dovish positions at the Fed and other central banks, along with positive earnings guidance and economic reports, provides support for the current bullish trend in stocks.