Early last week, stocks broke out, with the S&P 500 (SPY) setting a new high with blue skies overhead. But then the market basically flat-lined for the rest of the week as bulls just couldn’t gather the fuel and conviction to take prices higher. In fact, the technical picture now has turned a bit defensive, at least for the short term, thus joining what has been a neutral-to-defensive tilt to our fundamentals-based Outlook rankings.
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:
Last Wednesday’s FOMC minutes confirmed investor expectations by indicating that economic data does not yet warrant a fed funds rate hike in June, and investors took this as a reason to finally break out above stubborn technical resistance. Both PMI manufacturing and the Philly Fed index came in with readings that show some growth, but below expectations. The 4-week average on jobless claims fell to 266,000, which is quite promising. Equities remain the favored asset class this year, particularly those playing catch-up, like China, Japan, Europe — and even emerging markets.
It now has been almost three years since the market pulled back at least 10%. Nevertheless, bulls are having a hard time gaining traction after this latest technical breakout (basically flat-lining after last Monday), and a test of conviction is sure to come. The psychological thresholds of Dow (DIA) at 18,000, S&P 500 at 2100, Nasdaq (QQQ) at 5,000, and Russell 2000 (IWM) at 1200 all must hold as support levels, or we are back to the market churn, searching for a new catalyst.
The CBOE Market Volatility Index (VIX), a.k.a. fear gauge, closed Friday at 12.13 and has held below the 15 fear threshold since a brief spike to that level back on May 6-7. In addition, the volatility of volatility (i.e., the VVIX) reached its lowest level since July 2014. In fact, ConvergEx points out that the expected volatility has fallen over the last month for a range of equities including U.S. small caps, emerging markets, and 8 of 10 business sectors. On the other hand, bonds and precious metals have seen elevated volatility. But clearly equity investors have remained largely unfazed by the recent pop in long-term interest rates.
The 10-year Treasury yield (TNX) closed Friday at 2.22%. In the battle of central bankers in their race to debase, Fed chair Janet Yellen has previously stated that she does not want the euro to fall below 1.07 versus the dollar, and the ECB recently indicated that it doesn’t want the euro above 1.15. So there is the target range. It closed Friday around 1.10.
Oil has been the big question mark lurking in the minds of investors, with new reports coming out saying oil has bottomed and others saying oil has more downside. For now, price has stabilized and volatility has calmed. Notably, OPEC is actually predicting that crude oil prices would rise back to only $76 per barrel by 2025, which illustrates the marked erosion in the cartel’s ability to manipulate prices.
