Stocks are hitting new highs across the board, even though earnings reports have been somewhat disappointing. Actually, to be more precise, Q4 results have been pretty good, but it is forward guidance that has been cautious and/or cloudy as sales into overseas markets are expected to suffer due to strength in the US dollar. Healthcare and Telecom have put in the best results overall, while of course Energy has been the weakling. Still, overall year-over-year earnings growth for the S&P 500 during 2015 is expected to be about +8%.
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:
Despite cautious earnings guidance and a steady stream of doom-and-gloom in the news from all corners of the globe, the Dow Jones Industrials closed last week above 18,000, while the S&P 500 is pushing for a close above 2100 and the NASDAQ is gunning for 4900. For the week, the Dow gained +1.1%, the S&P 500 +2.0%, and the NASDAQ +3.2%. Furthermore, the S&P 400 Mid caps, the Russell 2000 small caps, and the broad Wilshire 5000 have all achieved new highs, as well. Evidently, U.S. equities remain a relative safe haven for cautious but hungry global investors who have cheap money in their clutches, thanks to global liquidity and currency wars.
Craig Lazzara of S&P Dow Jones Indices penned an article earlier in the month in which he observed that while the S&P 500 total return was -3% in January, the strengthening dollar-versus-euro exchange rate allowed European investors to earn +4% by holding dollar-denominated U.S. equities, as the euro fell -7% against the dollar. So, assuming the dollar continues to generally strengthen against other currencies, the U.S. stands to benefit from global capital flows, even as earnings among multinational U.S. firms encounter headwinds from the same strong dollar. This suggests the potential for near-term expansion in valuation multiples, which is not necessarily desirable. The forward P/E for the S&P 500 is now about 16.5x.
But that is about the only near-term bullish catalyst. Instead, news events and the threat of a sudden Black Swan remain in the forefront of investors’ minds, new highs in stocks notwithstanding. Not the least of which is the steadily metastasizing cancer of radical Islam — most prominently ISIS, with its Nazi-esque mass brainwashing and barbaric ethnic cleansings. This, along with ongoing issues in places like Greece, Ukraine, China, and Africa (including severe weather here in the U.S.), all contribute to the overall cautious sentiment displayed by investors and analysts alike. High-quality companies with solid business models and conservative accounting practices will reap the benefits.
