Last week, the S&P 500 put an end to its streak of weekly losses, despite giving back some gains on Friday. Thursday provided the big catalyst, with the ECB’s announcement of its bold new monetary stimulus plan. Investors were cheered and soothed for the moment. And U.S. fundamentals still look strong. But with Greece trying to turn back time, with volatility elevated (and likely to continue as such), and with the technical situation still dicey, the near term outlook is still worrisome.
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 the positive turn in the markets last week, this week has already brought a whole new set of issues to weigh on investors’ minds, starting with Sunday’s snap vote in Greece, which apparently has enough of the pain of austerity. Voters want to return to the past by rolling back austerity measures and thumbing their collective nose at the Eurozone and the broader international community of lenders. In reaction, the euro fell even further than it did in the face of the ECB’s stimulus announcement last week.
The ECB seeks to inflate asset prices and encourage hiring through an open-ended sovereign quantitative easing program that will inject 60 billion euros into European debt securities each month from March 2015 until at least September 2016. Heck, if it helped the U.S. recover, then why not try it everywhere? ECB President Mario Draghi, insisted that stimulus must be accompanied by reforms, because monetary policy alone will not be enough. But Europe still pines for the good old days that, unfortunately, are nothing more than nostalgia.
There is a very real danger that their QE won’t work like it did here, since the U.S. is considered the heart of the global economy and weakness here means weakness everywhere. Without structural reforms, the Eurozone could suffer the same fate as emerging markets in the 1990s. Global investors would love to see economic recovery and strength in European equities. But without an expectation of real economic growth, companies will simply use the enhanced liquidity to pay down debts rather than invest in the future. So for now, the asset classes of choice are distinctly 1990s-esque, i.e., long the U.S. dollar, long higher-quality U.S. equities, and long volatility.
The CBOE Market Volatility Index (VIX), a.k.a. fear gauge, closed Friday at 16.66, which is back below the important 20 threshold that suggests real fear, but still above the 15 level that indicates complacency. Whereas last year each spike in volatility quickly dissipated, we’ve seen it linger on the higher end of the spectrum so far this year.
Sabrient’s annual Baker’s Dozen portfolio of 13 top picks finished its sixth straight strong year (since 2009 inception), and this year is already off to a rousing start. Baker’s Dozen represents a sector-diversified group of 13 stocks based on our Growth at a Reasonable Price (GARP) quant model, which was created by our founder and chief market strategist David Brown (who long ago worked for NASA on the lunar landing project). The list is further vetted and confirmed through a rigorous forensic accounting review by our subsidiary Gradient Analytics to help us avoid stocks with elevated risk of accounting-related blow-ups.
