Stocks continue to hold up well, encouraged by improving global fundamentals and a solid Q1 corporate earnings season. However, at the moment most of the major US market indices are struggling at key psychological levels of technical resistance that have held before, including Dow at 21,000, S&P 500 at 2,400, and Russell 2000 at 1,400. Only the Tech-heavy NASDAQ seems utterly undeterred by the 6,100 level, after having no problem blasting through the 6,000 level with ease last month and setting record highs almost daily. Perhaps the supreme strength in Tech will be able to lead the broader market through this tough resistance level. Every time it appears stocks are on the verge of a major correction, they catch a bid at an important technical support level. In other words, cautious optimism remains the MO of investors – despite weighty geopolitical risks and, here at home, furious political fighting at a level of viciousness I didn’t think possible in the U.S.
There is simply no denying the building momentum in broad global economic expansion, and any success in implementing domestic fiscal stimulus will just add even more fuel to this burgeoning fire. That’s not to say that we won’t see a nasty selloff at some point this year, but I think such an occurrence would have a news-driven (or Black Swan) trigger, and likely would ultimately serve as a broad-based buying opportunity.
In this periodic update, I give my view of the current market environment, offer a technical analysis of the S&P 500 chart, review Sabrient’s weekly fundamentals-based SectorCast rankings of the ten U.S. business sectors, and then offer up some actionable ETF trading ideas. Overall, our sector rankings still look bullish, while the sector rotation model has returned to a bullish bias even though stocks now struggle at strong psychological resistance levels.Â
Market overview:
Q1 earnings season has been solid, no matter what caveats you hear from the naysayers seeking airtime. Over 80% of the S&P 500 companies have reported, with 75% meeting or beating estimates, and an average of 13.5% year-over-year EPS growth. Apple (AAPL) was one that failed to impress and yet the stock is still hitting new highs, pushing its market capitalization past $800 billion. Some new analyst price targets are suggesting it will soon reach $1 trillion market cap with the release of the iPhone 8.
Of course, Technology has been by far the top performing sector, up about +18% year to date. For example, NVIDIA (NVDA) is up about 25% just over the past couple of days after blowing away earnings estimates. And IPO activity is heating up, with some observers making predictions for this year reaching the level of the 1999 internet bubble heyday. It should come as no surprise that the NASDAQ 100 (+16.7% versus S&P 500 +7.0% YTD through Thursday) has been the powerhouse index when you consider that just five top-performing stocks – Apple (AAPL, +32.9%), Facebook (FB, +30.4%), Amazon.com (AMZN, +26.4%), Alphabet Google (GOOGL, +20.6%), and Microsoft (MSFT, +10.2%) – make up 42% of the Nasdaq 100 but only 13% of the S&P 500.
However, I don’t expect this trend of investor capital flowing strongly into these and other blue chip bellwethers continuing much longer, as their valuations – and by extension the valuations of the major cap-weighted market indexes – have become extended and cannot rely upon further multiple expansion much longer. Instead, I expect the market will resume its trend toward greater breadth and lower correlations (Convergex reports that average S&P 500 sector correlations are averaging under 60% YTD). Old-fashioned fundamentals (like top and bottom-line growth) once again matter to investors, creating winners and losers rather than all boats lifted in a highly correlated rising tide. I expect many of the high-P/E blue chips will ultimately underperform nimble, well-positioned, low-PEG small and mid caps.
On a related topic, the passive vs. active war of words continues, with DoubleLine Capital CEO Jeffrey Gundlach jumping into the fray last Monday at the Sohn Investment Conference. He believes that this period of massive capital flows away from active managers and into the cap-weighted passive indexes has run its course, and the stage is set for stock-pickers to outperform once again, with a preference for emerging markets over large-cap US. In fact, he recommended a pair trade of buying long the iShares MSCI Emerging Markets ETF (EEM) and shorting the SPDR S&P 500 Trust (SPY).
