Month: August 2016

SPDR S&P 500 (SPY)
SPDR DJIA (DIA)
PowerShares QQQ (QQQ)
Fidelity Contrafund (FCNTX)

The market has traded in a historically tight range over the past six weeks, as illustrated in the charts below. S&P 500 prices remained between 2170 and 2180 across nearly every trading day during those six weeks. Volatility is likely to normalize following Friday’s August employment report and the Labor Day weekend.

The Nasdaq had a wider trading range, though it also flattened after the first week of August. The Russell 2000 Index has climbed steadily over the past six weeks to lead index performance.

Fidelity Floating Rate High Income (FFRHX)
DoubleLine Core Fixed Income (DLFNX)
Thompson Bond (THOPX)
Fidelity Corporate Bond (FCBFX)
iShares iBoxx Investment Grade Bond (LQD)

Several Fed officials have contradicted Federal Reserve Chair Janet Yellen’s arguably dovish speech at Jackson Hole. While Yellen focused on general central bank strategy, discussing the possibility of lowering long-term interest rates and unconventional ways of easing monetary policy with short-term rates near zero, Fed Vice Chair Fischer sounded a more hawkish tone, citing near-maximum employment and its impact on the data that determines rate hike policies. San Francisco Federal Reserve Bank President John Williams has also publicly stated support for a September rate increase. While odds have lifted in response to recent comments, most analysts are not currently anticipating a hike until at least December.

The market is pulling interest rates higher regardless of Fed policy. The 10-year treasury yield spiked above 1.6 percent on Friday, breaking out of its recent trading range between 1.5 percent and 1.6 percent. Interest rates pulled back on Monday, but the move higher indicates market sentiment.

Sector Performance

Utilities slumped more than 2 percent and financials rallied more than 2 percent over the past week as investors adjusted interest rate expectations.

Among subsectors, regional banks benefited most from higher interest rates, while pharmaceuticals and biotechnology fell with Mylan’s (MYL) EpiPen scandal. Commodity-related stocks were generally lower, though coal miners bucked the trend.

A better-than-expected retail earnings season was interrupted by last week’s disappointing dollar store reports. The companies cited higher rents and higher healthcare costs for squeezing their lower-income customer base.

New home sales were strong last week, though existing home sales stalled with the possibility of higher interest rates. iShares US Home Construction (ITB) is on the cusp of a new all-time high.

First Trust USE Global Wind Energy (FAN) has surprisingly rebounded since bottoming in February due to hefty European exposure. Spanish firms comprise 23 percent of assets, followed by 13 percent in Danish and German companies, accounting for a total European exposure of about 63 percent of assets. Guggenheim Solar (TAN) shares, however, are still down about 30 percent from their 2016 high.

SPDR Energy (XLE)
First Trust ISE-Revere Natural Gas (FCG)
Market Vectors Steel (SLX)
Market Vectors Coal (KOL)

Commodities continued to exhibit weakness last week. SLX and COPX are both correcting, while copper prices sank back towards the post-2008 low. KOL rebounded slightly over the past week.

A stronger U.S. dollar and weaker Chinese yuan have challenged commodities in recent weeks.

Oil prices declined last week despite a drop in inventory. The stronger U.S. dollar and the end of a short-squeeze further impacted the energy market. The chart below depicts 2016’s elevated inventory in 2016 relative to 2015 highs.

Market Vectors Gold Miners (GDX)
Global X Silver Miners (SIL)

Gold mining shares finally experienced a meaningful correction. Shares of GDX are down nearly 20 percent from their 2016 high. There is some support around $25 for GDX. If this level is breached the correction could carry the fund to $20 a share.

iShares MSCI Emerging Markets (EEM)

Emerging market shares followed commodities lower for another week.

However, WisdomTree India Earnings (EPI) pushed to a new 52-week high, continuing the trend we reported last week. India passed legislation on Wednesday making it easier for foreign investors to obtain residency. Foreigners who invest at least $1.5 million can obtain a 10-year residency permit and maintain it as long as they employ 20 resident Indians each year.

The quiet summer trading season has been marked by exceptionally tight trading ranges; the S&P 500 Index has traded between 2160 and 2190 on all but a handful of days. The low volatility trend should continue this week ahead of the Labor Day weekend. Nevertheless, the market is within 1 percent of its all-time high.

Friday’s release of the monthly non-farm payroll and unemployment figures from the Bureau of Labor Statistics (BLS) will be the last employment report before the Fed’s September meeting. Fed Vice Chairman Stanley Fischer indicated last week that the jobs report could weigh heavily on interest rate decisions.   While the majority of analysts are not expecting a September hike, odds more than doubled to over 30 percent following the Jackson Hole statements and on Monday, the futures market odds of a December hike were already at 60 percent.

Other reports this week will include Personal Income and Outlays, the ISM and Markit Purchasing Managers’ Indexes (PMIs), weekly unemployment numbers and the latest light vehicle sales figures. July personal incomes and expenditures hit analyst expectations as auto sales lifted consumer spending. Income growth accelerated slightly faster than spending, pushing the savings rate up to 5.7 percent. Analysts believe PMIs will continue to reflect expansion, though at be marginally lower levels than last month. August light vehicle sales are expected to hit an annualized pace of 17.1 million, down from 17.8 million in July. Pending home sales for July and the latest S&P/Case-Shiller housing report will be out on Tuesday. The most recent U.S. trade balance figures will be released Friday.

Overseas, Chinese manufacturing and nonmanufacturing PMIs are expected to show an economic slowdown. Eurozone PMIs and Eurozone business confidence are expected to show a slight decline from the prior month. Rumors of more stimulus from the Bank of Japan could also affect markets this week, though the BoJ is not scheduled to meet until September 21.

Abercrombie & Fitch (ANF) and leisure athletic apparel company lululemon (LULU) will report earnings this week. Analysts expect ANF will report a net loss per share and LULU a 10 percent increase in earnings. In the tech sector, investors will hear from Saleforce.com (CRM) and Broadcom (AVGO). CRM’s earnings and revenues are expected to indicate quarter-over-quarter growth as the company expands into markets dominated by larger firms, such as Oracle (ORCL).

Other widely-held companies reporting this week include Campbell Soup (CPB) and H & R Block (HRB). Analysts expect earnings per share growth from CPB and a loss at HRB.

Markets have remained predictably quiet amid the late summer vacation season. Stocks traded lower following Fed officials’ statements at the Jackson Hole symposium, pulling the S&P 500 Index down on the week.

While the Fed failed to indicate an exact timetable for interest rate increases, officials cited a strengthening economy that increasingly supports a hike.  Voting member and Kansas City Fed president Esther George advocated for a hike in the near future, a sentiment echoed by Dallas Fed President Robert Kaplan. Fed Chair Yellen drew attention to favorable labor data and suggested the possibility of at least one additional increase in 2016, but stopped short of committing to a schedule.  Fed Vice Chair Fischer, however, indicated the possibility of a September hike. Stocks initially rallied and the U.S. dollar weakened following Yellen’s speech, only to reverse course in response to Fischer’s more assertive comments.

Healthcare dragged on the market this week following the widely-publicized Epipen price hike that quickly pressured the drug’s producer Mylan (MYL) to offer discounts and coupons to consumers of the life-saving allergy device. The sector rebounded on Friday, modulating the loss to about 1 percent for the SPDR Healthcare Select Sector ETF (XLV). was down about 1 percent on the week. SPDR Pharma (XPH) was harder hit, losing more than 3 percent on the week.

The latest manufacturing and services flash Purchasing Managers’ Indexes (PMI) for the U.S. and the Eurozone reflected stable private sector business activity. New home sales climbed to a nine-year high in July, while existing home sales fell more than expected. This lifted homebuilder stocks to their highest level in a month. Durable goods orders for July rose 4.4 percent, which was above expectations of 3.3 percent growth. The labor market remains strong, with the number of Americans filing for first-time unemployment benefits falling for a third consecutive week. Weekly oil inventory reported a build of 2.5 million barrels and merged with growing concerns regarding OPEC to send prices lower. The revised estimate of second quarter GDP growth ticked down 0.1 percentage point, to 1.1 percent.

The retail sector once again took center stage in the week’s earnings arena. Shares of Best Buy (BBY) jumped 16 percent to a 10-month high after sales and earnings handily beat analysts’ expectations. While revenues were comparable to year-ago numbers, the company’s profit rose 6 percent. Conversely, shares of Express, Inc. (EXPR) dropped 25 percent following disappointing sales and weak foot traffic similar to other brick-and-mortar fashion retailers. Poor forward guidance hurt Hewlett-Packard (HPQ), resulting in a modest decline in shares despite beating analysts’ earnings and revenue forecasts.

On Thursday, discount retailer Dollar General (DG) missed its top and bottom line revenue numbers as well as its earnings target. The company also reported poor same-store sales and announced weaker-than-expected forward guidance. Shares fell more than 18 percent. Shares of Dollar Tree (DLTR) similarly tumbled as earnings missed expectations and forward guidance disappointed investors. Both retailers discussed rising rents and the high cost of the Affordable Care Act as squeezing their low income customers. On the opposite end of the retail spectrum, shares of luxury vendor Tiffany (TIF) rose when the company reported better-than-expected profits for the second quarter.

SPDR S&P 500 (SPY)
SPDR DJIA (DIA)
PowerShares QQQ (QQQ)

Major indexes hit new all-time highs over the past week, led primarily by mid- and small-cap sector gains. The S&P 500 Index has slowly, but steadily risen over the past month as illustrated in the chart. SPY is trading 1.6 percent above its July 12 price- a solid double-digit annualized return.

Volatility has been typically low throughout the summer vacation season and the broader indexes are likely to trade relatively flat over the next week as higher trading activity generally picks up after Labor Day.

SPY

Fidelity Floating Rate High Income (FFRHX)
DoubleLine Core Fixed Income (DLFNX)
Thompson Bond (THOPX)
Fidelity Corporate Bond (FCBFX)
Fidelity High Income (SPHIX)
iShares iBoxx Investment Grade Bond (LQD)

Interest rates reflected the overall market calm. Falling credit risk pushed up the price of high-yield, investment-grade and corporate bonds. Shares of LQD are pushing towards a new all-time high after a period of consolidation. FCBFX and similar funds are already at new highs.

The 10-year Treasury bond yield spent most of the past six weeks between 1.5 percent and 1.6 percent, a tight range that mirrors the S&P 500 Index over this period. Federal Reserve Chair Janet Yellen’s speech at Jackson Hole on Friday could, however, shake the bond market out of its slumber. The symposium offers the last major public platform of the year to announce important rate policy decisions as many of the world’s central banks and financial movers and shakers will be in attendance.

Sectors

Sectors have also reflected the broader market’s low volatility. Rate-sensitive financials and utilities lagged a flat bond market, while materials and energy followed oil prices higher.

Utilities have been in a downtrend since early July as financials climb, matching the move in the 10-year Treasury bond yield. Small-cap utilities are down 8 percent from their July peak.

The financial rally may be signaling rate expectations, as dividend paying stocks have moved in a similar direction. The five dividend funds shown below have underperformed the S&P 500 Index since early July.

Home construction stocks rallied strongly this past week following surprisingly high new homes sales in July. Homebuilders sold 654,000 new homes last month, more than 10 percent above the prior month and 10 percent higher than estimates. Shares of ITB did not hit a new post-2006 high, but the sharp rebound brings it close. A breakout in ITB would be a great sign, not only for the housing market, but the overall economy as a major generator of GDP growth and new jobs.

Shares of GDX are poised to experience a sharp correction following a six-month uptrend.

SPDR Energy (XLE)
First Trust ISE-Revere Natural Gas (FCG)
Market Vectors Steel (SLX)
Market Vectors Coal (KOL)

Echoing the break in gold, energy and commodity shares have turned lower. Copper is leading the decline in industrial metals, even as iron ore and coal coke, two ingredients for steel, push back towards 2016 highs. The impact of a pullback will be widely felt in emerging markets.

Oil topped out at $49 a barrel in over the past week. A big build in U.S. oil inventory, up 2.5 million barrels versus expectations of a 500,000 barrel decline, pressured prices on Wednesday.

Fidelity Low-Priced Stock (FLPSX)

The rally in FLPSX is proceeding as expected. Two weeks ago, FLPSX moved to a new 52-week high. The inverse head-and-shoulders pattern gives a price target of $56, and shares accelerated over the past week.

iShares MSCI Emerging Markets (EEM)

Emerging market shares followed gold and commodities lower over the past couple of weeks. Although shares of EEM experienced a breakout by climbing above $36 per share, the advance is threatened if the commodities complex weakens.

Russia, South Africa and Brazil were the worst performing BRICS over this period, pulling emerging markets lower. China also pulled back.

India, a net importer of commodities and less reliant on trade for economic growth, held steady. The last chart compares the price of crude oil to WisdomTree India Earnings (EPI).