Of course, all eyes have been on Greece in an ongoing saga that, although critical to the Greeks, is mostly just an annoying distraction for global investors — partly because it has been going on for so many years, with the proverbial can of inevitability continually being kicked down the road, and partly because there can be no winners in this intractable situation. Predictably, the electorate chose to follow the advice of the communists that they elected and reject the rigid bailout offer, calling the bluff of the IMF, ECB, and Eurozone and betting they will do whatever it takes to avoid losing one of its members. These are uncharted waters, and with the resultant shadow of uncertainty hanging over the markets, traders fled to the safety of cash, and the S&P 500 has relied upon support from its 200-day simple moving average to kick in (both last Monday and again today). But the technical picture may be firming up for the bulls. Moreover, I would characterize the resulting market action as an orderly retreat rather than panic selling as traders appear to be simply taking risk off the table while preparing for a buying opportunity.
In this weekly update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review our weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable trading ideas, including a sector rotation strategy using ETFs and an enhanced version using top-ranked stocks from the top-ranked sectors.
Market overview:
At the close of 1H2015, among the U.S. business sectors, top performers for the first half were Healthcare and Consumer Services (Discretionary/Cyclical), particularly the homebuilders like the SPDR S&P Homebuilders ETF (XHB), while income-oriented Utilities and REITs, as well as Energy, and Metals & Mining have been big laggards. The 10-year US Treasury yield hasn’t moved much, closing last week at 2.39%.
Although Puerto Rico has thrown itself into the mix of debt calamities, the major crisis of the moment has been Greece and the Eurozone. After all, the whole concept of a single currency shared by such diverse cultures and politics effectively set up certain countries for failure. But although Spain, Portugal, and Ireland previously demonstrated that structural reform can work, Greeks are reluctant to endure any further pain and now are appealing to the charity and humanitarian nature of their creditors. Greek polls had been showing that a large majority of Greeks want to remain in the Eurozone but trust that they can win the game of chicken and reach a deal without the tax hikes and pension reform demanded by lenders and rejected by Prime Minister Tsipras and his communist Syriza party. If a so-called Grexit is indeed in the cards, that does not (and probably will not) mean an exit from the EU, but only from the Eurozone.
Despite the ongoing Greek saga, stocks in Europe, Australasia and the Far East (aka, EFA) have continued to outperform the US and emerging markets. However, China has given back much of its huge gains — after rising as much as 110% from November to a peak on June 12, Shanghai shares have fallen around 30%, and in the process has wiped out about $3 trillion in market capitalization. It might be hard to put that amount in perspective, so for comparison, it is more than the value of Germany’s entire stock market. Nevertheless, the Shanghai index remains up +14% YTD and +80% over the past 12 months. In an effort to staunch the bleeding and continue to facilitate the conversion of huge debts into equity, China cut interest rates for the fourth time since November, lowered required reserve ratios, allowed pension funds to invest in Shanghai shares, injected massive liquidity at lower rates, loosened margin trading rules and gave margin lenders enhanced liquidity, threatened the (mostly foreign) short sellers, put a moratorium on IPOs, and bought up shares every day in late trading to prop up prices. Most global investors look at China as the biggest risk to the global economy.
