ETF & Mutual Fund Watchlist for January 31, 2018

Equities hit new all-time highs in the past week and experienced their first two-day correction in 2018. Major indexes declined on Monday and Tuesday into negative territory before bouncing on Wednesday.

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SPDR Healthcare (XLV) rose with the biotechnology rally into the week, but reversed after Amazon (AMZN), J.P. Morgan (JPM) and Berkshire Hathaway (BRK.A) announced a joint healthcare initiative. The new non-profit group will work on reducing healthcare costs for employees.

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Within the healthcare sector, medical devices gained on the week, but other subsectors lost ground. The pullback in biotech was modest in comparison to recent gains. Pharma stocks also lost ground.

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Among the smaller sectors, utilities rebounded despite rising interest rates. The energy sector lagged.

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Energy services, natural gas, and explorers have weighed on the broader energy sector over the past week. West Texas Intermediate crude oil fell from a peak above $66 per barrel to $64 on rising U.S. production. America is less than 100,000 barrels away from hitting 10 million barrels per day in output.

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The 10-year Treasury yield climbed above 2.7 percent this week. The 30-year Treasury rallied towards 3.0 percent. The spread between the 10-year and 30-year has collapsed over the past five months from 0.6 percent to 0.2 percent. The spread between the 2-year and 10-year Treasury yield stopped tightening at the start of 2018 as the 2-year Treasury yield leveled off.

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High-yield, short duration such as Virtus Seix Floating-Rate High Income (SAMBX) and Thompson Bond (THOPX) are the only bonds gaining ground amid rising interest rates. Long-duration treasuries fell significantly, followed by high-yield bonds with intermediate and long duration.

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Rising interest rates remain bullish for the financial sector. SPDR S&P Regional Banking (KRE) moves almost in lockstep with the 10-year Treasury yield. Banking shares have room to run because they haven’t outperformed the S&P 500 as much as expected given the rise in rates. In contrast, the utilities sector has caught up to the rate hike. (The utilities relative price chart is inverted, with the outperformance of SPY versus XLU.)

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Value stocks also have room to catch-up with higher interest rates. The financial sector has been a market performer. Energy, materials, and the transportation subsector of industrials have lagged over the past few weeks.

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Despite a weaker U.S. dollar, SPDR S&P 500 (SPY) gained ground on iShares MSCI EAFE (EFA) in the past week. Over the past year, iShares Emerging Markets (EEM) outperformed SPY by roughly the same amount as PowerShares DB U.S. Dollar Index Bearish (UDN) gained.

The relative performance of SPY versus EEM looks like it might put in a triple-bottom. The bounces in September and late November both coincided with bounces in the U.S. dollar.

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President Trump called for $1.5 trillion in infrastructure spending in his State of the Union speech on Tuesday. As expected, traders sold the news, sending the only pure-play infrastructure ETF down on Wednesday.

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Boeing (BA) and Lockheed (LMT) lifted the defense sector this week with strong earnings. Boeing (BA) beat fourth-quarter estimates by 6 percent, but nearly doubled earnings with tax benefits included. The firm’s backlog hit $488 billion and guidance was positive.

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Higher interest rates dented homebuilder shares. The sector lost ground for six consecutive days through Tuesday. Short-term traders may be behind the move though, since the housing market typically doesn’t peak until the Federal Reserve’s rate hike cycle nears its end.

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Market Perspective for January 29, 2018

Rising bond yields weighed on equities Monday morning. The 10-year Treasury yield rose above 2.7 percent for the first time since April 2014. Real estate and utilities shares fell more than 1 percent during the trading day. Consumer staples, consumer discretionary, healthcare and financial shares traded flat or modestly higher. Biotechnology extended its bullish run from last week.

Economic data will be light this week. Personal income, consumer spending and inflation data for December were released on Monday. Personal income beat expectations, while consumer spending missed, but remained at a 6-year high. Core inflation was 0.2 percent, in line with estimates. Consumer confidence for January will be out on Tuesday, December pending home sales on Thursday, and manufacturing PMIs for various nations on Friday. The Federal Reserve will meet this week for Janet Yellen’s last meeting as Fed Chair. Speculators pushed the odds of a March hike to 75 percent on Monday.

While the 10-year Treasury yield hit a new multi-year high today, the 30-year Treasury yield is still below October levels at 2.9 percent. It traded at 3.2 percent in April 2014. The spread between these two narrowed on Monday to 0.24 percent. A year ago, it was 0.6 percent.

Crude oil prices eased on Monday, with West Texas Intermediate crude sliding to $65 and change. The U.S. dollar strengthened on higher interest rates and dovish comments from the European Central Bank. Comments from the ECB as well as Treasury Secretary Steve Mnuchin sent the euro exchange rate sharply higher last week. On Monday, ECB officials pushed back with an anonymous source saying the ECB will taper.

S&P 500 companies grew earnings 12 percent in the fourth quarter, based on reported earnings and estimates of companies yet to report. Energy, materials, financials, technology and utilities all reported faster earnings growth than the index. Lockheed Martin (LMT) beat revenue estimates on Monday and delivered strong guidance. Shares climbed nearly 2 percent in trading. The report also boosted the sector. iShares U.S. Aerospace & Defense (ITA) advanced on the day.

Later this week, we’ll hear from Pfizer (PFE), McDonald’s (MCD), Facebook (FB), Eli Lilly (LLY), Ebay (EBAY), Microsoft (MSFT), AT&T (T), PayPal (PYPL), Boeing (BA), Qualcomm (QCOM), Google (GOOGL), Altria (MO), Amazon (AMZN), Apple (AAPL),  Visa (V), DowDuPont (DWDP), Mastercard (MA), Amgen (AMGN), United Parcel Service (UPS), Merck (MRK), Chevron (CVX) and Exxon (XOM).

Market Perspective for January 26, 2018

Equities hit new all-time highs this week, despite a weaker dollar and GDP miss. The Nasdaq led with a 2.31-percent gain. Earnings drove the market higher. Netflix (NFLX) reported strong subscriber growth and shares rallied nearly 25 percent on the week. Shares of Intel (INTC) and AbbVie (ABBV) also rose double-digits on Friday following strong earnings.

Healthcare was the best performing sector, led by biotechnology acquisitions and strong earnings Biogen (BIIB). SPDR S&P Biotech (XBI) gained 8.18 percent this week. SPDR Healthcare (XLV) rose 3.51 percent.

The fourth-quarter GDP growth rate missed expectations of 3 percent by 0.4 percent.  There was strong consumer spending in the report. Personal consumption increased 3.8 percent, versus 2.2 percent in Q3. By itself, this consumption was responsible for 2.6 percent growth in GDP. Nonresidential fixed-asset investment increased 6.8 percent, up from 4.7 percent in Q3. Rising imports shaved 2 percent from GDP growth, and trade produced an overall drag of 1.1 percent.

Other economic data was solid this week. The flash manufacturing PMI for January rose slightly from December, while the services PMI eased slightly. Weekly jobless claims fell to 233,000. New home sales declined to 625,000 from last month’s revised 689,000. Durable goods orders increased 2.9 percent in December, well above the 0.9 percent consensus estimate.

The 10-year Treasury yield opened higher on Monday but failed to extend its gains during the week. It finished at 2.66 percent. SPDR Utilities (XLU) gained 2.10 percent as interest rates paused.

Even though the dollar weakened substantially this week, domestic shares outperformed. SPDR S&P 500 (SPY) gained 2.20 percent and iShares MSCI EAFE (EFA) increased 1.51 percent. iShares MSCI Emerging Markets (EEM) did benefit, rallying 3.25 percent.

Crude oil started the week with a very brief dip before rallying. West Texas Intermediate crude oil finished the week above $66 a barrel.

Although stocks were strong this week, we saw continued profit taking in some industrial subsectors. The Dow Jones Transportation Index fell 1.59 percent. Most of the weakness was in the airline sector. U.S. Global Jets (JETS) fell 4.74 percent.

Caterpillar (CAT) earned $2.16 per share in the last quarter, well ahead of the $1.79 forecast. 3M (MMM) beat earnings, revenue and increased guidance for this year. Starbucks (SBUX) missed earnings estimates, but it became the latest company to announce higher worker pay thanks to tax reform. General Electric (GE) also missed estimates, sending shares to a new 52-week low.

ETF & Mutual Fund Watchlist for January 24, 2018

The major indexes have all moved higher in the past week. The Nasdaq climbed more than 2 percent before sliding on Wednesday. The iShares Transportation Average (IYT) chart reflects a 20-percent rally over the prior two months before this week’s Dow Transports consolidation.

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The consumer discretionary sector provided the biggest lift for the Nasdaq. Within that sector, Netflix (NFLX) reported stronger than expected subscriber growth. Shares rallied 10 percent the next day.

Rising interest rates lifted financial shares. Industrials struggled after General Electric (GE) tumbled to a new 52-week low.

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Higher interest rates weighed on utilities, though rising oil prices boosted energy. Utilities and real estate prices have declined as interest rates increased. Banks have broken out to new highs.

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There were several important breakouts this week. The 10-year Treasury yield climbed to a new 3-year high and has now completed a bullish pattern.

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Corporate, investment-grade and government bonds with longer durations are down. High-yield bonds are doing well, but floating-rate funds are doing best.

Inflation-protected bonds are not doing well, indicating the rise in rates is real and not related to rising inflation expectations. Short-term bond funds are holding up well. Emerging market bonds denominated in local currency are rising on the weaker dollar, but emerging market bond funds denominated in U.S. dollars are falling.

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While the dollar remains in a long-term bull market stretching back to July 2014, the current decline has turned the intermediate-term picture bearish. In contrast, the euro has broken out to the upside.

Weakness in the U.S. dollar has boosted emerging markets, but developed markets are struggling to outperform U.S. stocks.

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Many ETFs are achieving bullish breakouts. iShares MSCI Peru (EPU) hit a new all-time high on Wednesday.

Merger mania in biotechnology pushed SPDR S&P Biotech (XBI) to a new all-time high. Two deals were announced on Monday.

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SPDR Gold Shares (GLD) is tracing out a pattern like the 10-year yield, but larger. It would only take a move of about 7 percent to achieve a breakout.

Global X Silver Miners (SIL) has broken out of its downtrend. VanEck Gold Miners (GDX) looks similar to the 30-year treasury yield. GDX is 4 percent away from a new 52-week high.

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Crude oil has completed a multi-year basing pattern. A move towards $70 is now in play. Fundamentals, such as rising U.S. production could slow or stop the rally, but if the U.S. dollar has peaked, this could be the opening phase of a long-term rally back to $100 oil.

SPDR Energy (XLE) hit a 3-year high this week.

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President Trump approved tariffs on solar panels and washing machines this week. Shares of Guggenheim Solar (TAN) jumped on the news, but declined on Wednesday with the broader technology sector.

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