As Q1 of 2014 comes to an end, we can see that January was extremely weak, February gained it all back, and March treaded water. At this point, as we head into what has been the strongest month of the year over the past 20 years, signals are mixed, with a steadily recovering economy and bullish fundamental indicators mixed with neutral technical and some bearish sentiment indicators.
Most of the ETF inflows in Q1 have been into bond funds rather than rotating out of bonds and into equities, as has been expected given a recovering economy and Fed tapering. So, rather than seeing rising interesting rates, Treasury yields have come down, with the 10-year yield closing Friday at 2.72% (versus a 52-week high of 3.06% and 52-week low of 1.62%). Also, gold has made something of a comeback this year, up over +7% YTD. With the fed funds rate due to increase no sooner than six months after tapering is complete, we should see short-term rates remain low until around mid-2015.
There has been a notable selloff recently in many of the momentum stocks. This has been expected for some time, as the high equity correlations and “all boats lifted in a rising tide†mentality of 2013 transitions into a more thoughtful stock-picking environment, which should lead more investment capital into the higher quality companies and less into the speculative darlings. Also, the Russell 2000 small caps took a -3.5% hit last week. On the other hand, stocks in China and emerging markets have been trying to bounce after a miserable stretch. iShares China Large Cap (FXI) recently broke above its 50-day moving average, and the iShares MSCI Emerging Markets (EEM) is back above both its 50- and 200-day moving averages.
Among the ten U.S. business sectors, Among the ten U.S. business sectors, Energy was the big winner last week, up more than +2%. Utilities is still the leader year-to-date (+7.5%), followed by Healthcare (+4%). This is similar to what happened during Q1 of 2013.
When long-term rates finally begin to rise and the yield curve steepens, the Financial sector should prove to be a beneficiary. Notably, the securities industry paid $26.7 billion in bonuses during 2013, which was the highest since 2008. However, 904 hedge funds closed their doors during 2013, many of them long/short equity or global macro strategies, which proved particularly difficult in the prevailing market environment.
The CBOE Market Volatility Index (VIX), a.k.a. “fear gauge,†has been staying right around 15 during the period of consolidation, which is slightly elevated from the low levels below 12 that it was hitting during the periods of market strength. Most market observers are expecting higher volatilities going forward.
SPY chart review:
The SPDR S&P 500 Trust (SPY) closed Friday at 185.49, which is still within spittin’ distance of its all-time highs. After a pullback from overbought conditions at the top of the long-standing rising channel, SPY continues to find support from prior resistance-turned-support at 185, and it sits smack dab in the middle of the rising channel. It also tested its 50-day simple moving average on Thursday. The sideways consolidation pattern has morphed into what might be a descending triangle pattern, which could be foretelling a reversal signal (bearish). On the other hand, it might be just some more of the same sideways action that could break either direction, and oscillators RSI, MACD, and Slow Stochastic have all worked off their overbought conditions and now are either in a neutral or oversold position (bullish).
