Bulls Retake The Wheel, With A Little Help From Their Friends At The Fed

Well, it didn’t take long for the bulls to jump on their buying opportunity, with a little help from the bulls’ friend in the Fed. In fact, despite huge daily swings in the market averages driven by daily news regarding timing of interest rate hikes, the strength in the dollar, and oil prices, trading actually has been quite rational, honoring technical formations and support levels and dutifully selling overbought conditions and buying when oversold. Yes, the tried and true investing clichés continue to work — “Don’t fight the Fed,” and “The trend is your friend.”

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 week, global equity markets posted their biggest weekly gain in nearly two years. The S&P 500 is back above 2,100, the Dow Jones Industrials is back above 18,000, NASDAQ is above 5,000, and Russell 2000 is at new highs. Even China is performing well. Yes, the bulls are back in control and feasting on bear claws. Risk on.

The big catalyst last week of course was the FOMC announcement that at once removed the word “patient” from their strategy but also indicated some concern about the economy. The committee acknowledged that the strong dollar is hindering GDP growth and inflation. Indeed, recent economic data on retail sales, manufacturing, and home building have all been weak. Investors interpreted this to mean a further delay in raising rates, i.e., bad news is good news. After all, rising rates would only serve to make the dollar even stronger. The most likely scenario seems to be a token rate increase in September, followed by very slow going from there.

The S&P 500 has fluctuated an average of 24 points per session so far this year, which is the largest since December 2011. The dollar is up more than 20% over the past year, while oil prices are still quite low, causing many investors to worry that prices could fall too far, negatively impacting oil development projects and by extension the overall economy rather than simply giving consumers some extra spending money.

Top performing sectors so far this year have been Healthcare, Consumer Services (Discretionary/Cyclical), and Telecom. However, keep in mind, the S&P 500 was flat as of the prior Friday (3/13) before last week’s +2.6% rise put the wind back in the bulls’ sails, so it’s no surprise that the top performers have been somewhat defensive.