ETF Investor Guide for July 2016

The July issue of the ETF Investor Guide is NOW AVAILABLE! Links to the July Data files have been posted below. Market Perspective: Caution Remains Warranted as Stocks Hit New […]

ETF & Mutual Fund Watchlist for July 20, 2016

SPDR S&P 500 (SPY)
SPDR DJIA (DIA)
iShares Core High Dividend (HDV)
Vanguard Dividend Appreciation (VIG)
Vanguard High Dividend Yield (VYM)
iShares MSCI Edge Minimum Volatility USA (USMV)
iShares 20+ Year Treasury (TLT)
iShares iBoxx $ Investment Grade Bonds (LQD)

Strong earnings reports from key blue chip companies, such as J.P. Morgan (JPM) and Johnson & Johnson (JNJ), along with positive data, pushed major indexes to new all-time highs again last week. The Nasdaq and Russell 2000 are catching up now that the bull advance has resumed. The Russell 2000 price index has the farthest to go, with a gain of more than 8 percent needed to break the current all-time high.

Dividend funds continue to perform well, but a shift towards riskier assets has them lagging the broader market for now. Treasury bonds and investment-grade bonds both continued their July pullback. Given the strength of the prior advance, a further bond correction is probable.










Fidelity Floating Rate High Income (FFRHX)
DoubleLine Core Fixed Income (DLFNX)
Thompson Bond (THOPX)
Fidelity Corporate Bond (FCBFX)
Fidelity High Income (SPHIX)

Both FFRHX and THOPX have extended rallies in the face of higher interest rates and a brief pause for the high-yield debt market. In contrast, SPHIX has flat-lined since July 11 as the high-yield market digests the drop in oil prices. As reflected in the second chart of SPHIX oil prices and high-yield bonds traded in tandem for the past 18 months and have been correlated since the U.S. dollar bull market began two years ago. The correlation is likely to remain in effect for the near-term as oil producers are still at increased risk of default or bankruptcy. This creates considerable volatility for those energy-related high-yield bonds.






Sector Performance

Energy is weighing on value in July, offsetting the support from financials. With the growth sectors of the market starting to outperform value could continue to struggle relative to growth in the near-term. Both value and growth, however, are making new all-time highs.

Materials was the best performing sector for the second straight week, followed by financials, which benefited from strong earnings at J.P. Morgan (JPM), Morgan Stanley (MS) and Citigroup (C). The defensive utilities and consumer staples sectors were subdued by investors’ rising risk appetites.

Subsectors indicate a similar breakdown, though materials sector strength is rather narrowly focused in areas such as chemicals. Commodity sectors such as steel, precious metals, copper and coal all saw a pullback in recent days. Softbank’s buyout of chipmaker ARM Holdings bolstered the semiconductor sector. Although the stock is a small holding in iShares PHLX Semiconductor (SOXX), the surprise move could spur consolidation in the industry.

Healthcare is still working its way higher and remains in the same volatile pattern since bottoming in February. It’s likely the broader rally could break this pattern, but otherwise we may see another couple weeks of consolidation before healthcare pushes higher again. The outlier remains medical devices, which has frequently made new highs this year.








iShares MSCI Emerging Markets (EEM)

EEM and other emerging market funds remain attractive for risk tolerant investors at this time. An upside breakout is possible with an inverse head-and-shoulders completed, which has a price target of $44 per share. EEM is in limbo between $35 and $36; above $36 it will likely attract bullish traders, while below $35 the head-and-shoulders pattern will be at risk of failing. EEM is unlikely to rally by itself. A push higher would need to be accompanied by a weaker U.S. dollar and higher commodity prices, including oil.

Fidelity Puritan (FPURX)
Fidelity Low-Priced Stock (FLPSX)

FPURX broke out to a new all-time high this month. The $20.60 level is now support. FLPSX has yet to break out, having paused in the past week. It still needs to overcome $49.50, which is the nearest resistance point. After that is cleared, an advance towards the all-time high is likely.


Market Perspective for July 18, 2016

Markets rallied strongly last week in response to positive earnings and the move carried into the start of this week. Major indexes remarkably opened to the positive on Monday morning despite recent violence and geopolitical unrest, signaling unprecedented resilience in the world’s economies. The Dow Jones Industrial Average and S&P 500 Index are achieving new records with every positive closing. Although still below its all-time high, the small- cap Russell 2000 could surpass the Dow as best performing major index in 2016. In addition to the substantial rally that has followed Brexit, business opportunities are beginning to appear on Great Britain’s horizon.  Japan’s Softbank Group has announced its largest investment to date with the purchase of British microchip manufacturer ARM for just over $32 billion, signaling global confidence in Britain’s post-Brexit future.  ARM provides chips for almost all of the world’s smartphones, including the Apple iPhone and has handily outperformed apple YTD.

Almost 20 percent of the S&P 500 reports earnings this week. On Monday, Bank of America (BAC) reported a decline in profits from last year as low interest rates squeezed lending profits, but strong bond trading amid the Brexit storm lifted earnings beyond estimates to rally shares more than 1 percent. BAC is the fourth big bank to report this season and the third to beat estimates. Goldman Sachs (GS) and Morgan Stanley (MS) are scheduled to report later this week.

Monday’s major earnings reports include Netflix (NFLX) and International Business Machines (IBM). NFLX shares have steadily declined over the past year amid competition pressure, but with over 700 new worldwide subscribers each quarter, an earnings miss would only serve to extend the opportunity to buy NFLX at a value. On Tuesday, investors will hear from Johnson and Johnson (JNJ), Microsoft (MSFT) and Lockheed Martin (LMT). Intel (INTC) and Halliburton (HAL) will report Wednesday, while Thursday brings earnings from Amazon (AMZN), General Motors (GM) and Visa (V). General Electric (GE) and Honeywell (HON) report Friday.

Yahoo (YHOO), Qualcomm (QCOM), Philip Morris International (PM), Regions Financial (RF), Illinois Tool Works (ITW), Abbot Labs (ABT), St. Jude Medical (STJ), American Express (AXP), Starbucks (SBUX), Vale (VALE), PulteGroup (PHM), Chipotle (CMG), Biogen (BIIB), Schlumberger (SLB) and AT&T (T) will also report this week.

Financials, Industrials, energy services, pharma and large-cap technology will generate the greatest earnings-related impact this week.  Regional banks are likely to follow larger institutions into higher territory due to rate hike delays and loan activity.

Alcoa (AA) and JPMorgan Chase (JPM) set a high bar last week with strong earnings reports. S&P 500 earnings were initially expected to fall 5.6 percent, but improved to 5.5 percent after last week’s reports. As of Friday, 66 percent of reporting S&P 500 companies beat earnings estimates. If this pace of earnings beats continues, we will see S&P 500 earnings growth improve substantially from those initial estimates.

U.S. housing starts and building permits for June will be available this week, as well as Wednesday’s Crude oil inventory and mortgage purchase application index data. The crude oil market is in the midst of a bull-bear battle around $45 per barrel. Falling crude inventories have been offset by rising distillate inventories, giving each side some fundamental support. Home builder stocks are trading near their 52-week high and only need a small push to enter a new post-2007 high.

The highly anticipated European Central Bank rate decision, the first since Britain’s decision to exit the European Union will be announced on Thursday in addition to the release of the U.S. weekly unemployment claims, existing home sales and the Philly Fed manufacturing survey. Friday’s reports will include the flash Purchasing Manager Index numbers from Japan, the Eurozone, the UK and the U.S. Analysts expect all of those reports to indicate slight improvement in the manufacturing sector.

 

Market Perspective for July 16, 2016

Markets reached new all-time highs this week. Mega banks lifted stocks with much better-than-expected earnings. Positive economic news and favorable central bank policies also fueled bullish sentiment. The Dow hit a new all-time high above 18,500, the S&P 500 recorded a new all-time intraday high of 2165 and the Nasdaq closed above 5,000 for the first time in 2016. The Russell 2000 Index climbed above 1200 for the first time since December 2015. The Financial Select Sector SPDR (XLF) was one of the best performing sectors this week, joined by materials, energy, industrials and technology.

Industrial bellwether Alcoa (AA) led off this earnings season with better-than-expected numbers on Monday. The company reported earnings per share of $0.15 on revenues of $5.3 billion. Shares of the company rose 4 percent on the news, and the broader commodity rally carried shares to a 10 percent gain on the week. JPMorgan Chase (JPM) also exceeded expectations with consensus EPS of $1.55 and revenues of $25.21 billion. The company reported impressive loan growth to businesses and consumers, plus a boost in trading profit following Brexit.

Like JPM, Citigroup (C) handily beat earnings estimates, but the bank generates more of its revenue overseas. A strong U.S. dollar headwind drove earnings down 14 percent from last year. The banks reported EPS of $1.24 on revenues of $17.55 billion. Wells Fargo (WFC) reported earnings that matched analysts’ expectations with EPS of $1.01 on lighter-than–expected revenues of $22.16. The overall financial sector with increases in loan origination, mortgage applications and consumer credit

The reports benefited smaller banks that lack investment banking, international and concentrated sector exposure. Regional banks rallied all week and bucked the weakness in some larger banks on Friday as investors focused on lending growth.

In the commodity space, gold fell nearly 3 percent while oil prices were relatively flat. Coal, steel and copper stocks set new 52-week highs. The U.S. dollar pushed higher as it gained more than 4 percent versus the yen. Bonds finally corrected, sending the 30-year Treasury indexes lower on the week. Overseas trading was also positive and the rally in commodity shares pushed iShares MSCI Emerging Markets (EEM) close to a 52-week high.

Rising bond yields weighed on utilities and consumer staples, which paced gains in most dividend funds, but value funds tended to perform well thanks to outperformance from financials and materials, coupled by growth subsectors such as biotechnology and Internet shares.

The May Job Openings and Labor Turnover Survey (JOLTS) reported fewer openings fell during the month, but they remain at multi-year highs. The number of workers filing new unemployment claims remained the same as last week despite the expectation of a slight increase. With interest rates at three-year lows, mortgage refinancing surged 11 percent while applications for new home purchases were down slightly. The Federal Reserve Beige Book indicated modest economic growth in most regions of the country. The Producer Price Index (PPI) and Consumer Price Index (CPI) increased 0.5 percent and 0.2 percent respectively in June. Retail sales climbed 0.6 percent in June, well ahead of the consensus estimate of 0.1 percent. Retail sales ex-autos increased 0.7 percent and online retailers saw sales rise 1.1 percent.