Month: February 2018

All major indexes gained ground over the past week, with the Nasdaq outperforming the Russell 2000 by almost 1 percent.

Technology led the week’s performance, followed by financials. Healthcare, consumer discretionary and industrials all had similar returns.

The smaller sectors in the S&P 500 Index underperformed the larger sectors. Wal-Mart’s (WMT) earnings miss sent its shares down 10 percent on Tuesday. WMT is a top component in the consumer staples sector.

Merger activity lifted technology shares this week. Broadcom (BRCM) made a hostile bid for Qualcomm (QCOM) earlier this year, but Qualcomm had already made an offer for NXP Semiconductors (NXPI). This week, Qualcomm upped its bid for NXP in part to fend off Broadcom. The semiconductor ETF was up nearly 5 percent for the week in early Wednesday trading.

High-yield bonds snapped back this week as credit risk eased. With interest rates steady in over the past week, the dip in credit risk pushed high-yield funds higher. Floating-rate funds such as PowerShares Senior Loan Portfolio (BKLN) continued to perform well.

The 10- and 30-year Treasury yields stabilized over the past week. Both remain very close to achieving new multi-year highs. The 5-year yield has already broken out to the upside. The 2-year Treasury yield is back to levels seen in the early 2000s. Libor has already started pricing in a rate hike at the Fed’s March meeting.

SPDR Bank (KBE) and Regional Banking (KRE) were the best performing subsector funds in the financial sector this week.

SPDR S&P Biotech (XBI) and FirstTrust NYSE Arca Biotechnology (FBT) briefly reversed earlier breakouts during February selling, but have since climbed higher. Large-cap funds such as iShares Nasdaq Biotechnology (IBB) have yet to exceed 2015 highs.
XBI

Crude oil has traded above $60 for most of 2018, though it did slide about $8 from peak-to-trough during February.

Strength in technology contributed to relative weakness in value versus growth funds this year.

The U.S. Dollar Index has triple-bottomed in the past month in intraday trading. PowerShares U.S. Dollar Index Bullish (UUP) needs to climb above the recent high of $23.60 to stage a larger rally.

With the U.S. dollar stabilizing, the outlook for foreign stocks is dimming. The S&P 500 is trading at a new 2018 high versus the MSCI EAFE and it could easily exceed the 2017 multi-year high if the U.S. dollar achieves even a modestly bullish rally.

Although emerging markets are outperforming developed markets, they still haven’t broken out to a new relative high versus the S&P 500 Index. EEM has failed to breakout versus SPY multiple times over the past six months. A downside breakout in this ratio would be very bullish for emerging markets.

Equities have regained more than half of last week’s pullback. The Nasdaq and Russell 2000 were positive on the week in early morning trading, while the Dow Transports lagged, still down 1.4 percent.

Technology and financials earnings drove the broader market advance, while higher interest rates lifted bank stocks.

Rising rates on Wednesday weighed on the utilities sector following a week of relative outperformance.

Bank stocks have outperformed technology shares over the past week due to persistently high interest rates.

January CPI came in hotter than expected at 0.5 percent headline and 0.3 percent core, unchanged over the past 12 months.

The 10-year and 30-year Treasury yields rose on Wednesday and closed at new multi-year highs over the past week, and new highs again following the inflation report.

While long-term rates are approaching resistance, short-term rates are rallying. The odds of a Federal Reserve March rate hike increased from 77 to 83 percent on Wednesday. The odds of three hikes this year climbed past 60 percent. One- and three-month Libor have begun pricing in this expected rate increase.

Although floating-rate funds and short-duration funds are not vulnerable to rising interest rates, they dipped a bit as credit risk ticked up amid last week’s sell-off in stocks. Still, floating-rate funds outperformed investment-grade, corporate and high-yield bonds.

The yen rallied on Wednesday, extending a six-week run. The move closed the gap between gold and yen that had widened since last summer.

Emerging markets rallied in the past week and are pushing towards relative highs made in September.

Oil prices stabilized this week after sliding with equities. West Texas Intermediate crude oil was back above $60 on Wednesday after a drawdown of inventory. SPDR Energy (XLE) stabilized as well.

Healthcare stocks rallied strongly this week. Biotechnology merger activity drove gains in January, but the volatility-driven sell-off buffered the advance. As stocks recover, investors refocused on the upside potential in the sector. Biotech, medical devices and healthcare providers are up for the year. Pharmaceuticals have continued to drag on performance.

Equities retraced more than 50 percent of last week’s losses on Monday. The S&P 500 Index gained 1.46 percent. Industrials, technology, and financials pulled indexes higher. Utilities underperformed despite a decline in interest rates as traders reversed defensive positions. SPDR Materials (XLB) led performance on Monday after DowDuPont (DWDP) climbed 3.40 percent. The Dow Transports outperformed with an increase of 1.62 percent, the Russell 2000 lagged with a gain of 0.89 percent.

The VIX eased to 25.6 on Monday. The spike to 50 last Monday in large part sparked the sell-off. The prior 52-week high was 17.3. If the market sustains its rally this week, the VIX could normalize to the low teens by Friday.

January inflation data will be closely watched on Wednesday. Economists forecast 0.4 percent headline consumer inflation and 0.2 percent in core CPI. Retail sales are projected to rise 0.2 percent and 0.4 percent ex-autos. Later in the week, we’ll see January industrial production, the February NAHB Homebuilders’ index, housing starts and building permits for January.

Crude oil started the week higher, but bears put up some resistance at the $60 level. Mild winter weather pushed natural gas back towards December lows. SPDR Energy (XLE) gained 1.44 percent on the day.

The 10-year Treasury yield finished at 2.86 percent on Monday, the 30-year Treasury yield at 3.14 percent. The key levels to watch in the week ahead are 3.0 percent on the 10-year and 3.3 percent for the 30-year. Bond bears will stay in hibernation as long as those levels provide stiff resistance.

The U.S. Dollar Index took a breather after a six-day winning streak. Even though the U.S. dollar weakened, foreign shares trailed domestic shares yet again. iShares MSCI EAFE (EFA) rose 1.37 percent on Monday. iShares MSCI Emerging Markets (EEM) gained 1.57 percent. iShares China (FXI), a driver of recent emerging market strength, advanced only 1.24 percent.

President Trump unveiled a budget that includes $1.5 trillion in infrastructure spending. The plan calls for $200 billion in federal spending for each of the next 10 years, with incentives designed to attract state, local and private spending of roughly $1.3 trillion. Global X U.S. Infrastructure Development (PAVE) climbed 1.44 percent, in line with the broader stock market.

We’ve passed the peak of earnings season with only about a quarter of the S&P 500 Index left to report.  The blended earnings growth rate is 14 percent coming into this week, up from the 11-percent estimate at year-end. (PEP), Baidu (BIDU), Occidental Petroleum (OXY), MetLife (MET), Martin Marietta Materials (MLM), Cisco (CSCO), Applied Materials (AMAT), Marriot International (MAR), Credit Suisse (CS), Zoetis (ZTS), Coca-Cola (KO), KraftHeinz (KFT), Deere (DE) and Enbridge (ENB) are all scheduled to report this week.