Stocks saw elevated volume and volatility last week, and the 100-day simple moving average on the S&P 500 proved to be the proverbial line-in-the-sand for bullish investors. I opined last week that the market seemed to have sufficiently cycled back down to oversold territory, so with a little more technical consolidation and successful testing of nearby support levels, the next move higher could easily commence at any time. So, the question remains as to whether that was the big new buying opportunity, or whether more backing-and-filling is needed. Personally, I would prefer to see a successful test of the 200-day SMA, but the market might not be so generous.
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:
U.S. Treasuries continue to enjoy strong demand. The 10-year yield fell even further this week, closing Friday at 2.42%. So, the bond market is telling us that the Fed will not raise interest rates in the near term. However, high-yield corporate bonds, which have enjoyed a multi-year bull run as income investors have taken on risk in search of higher yields, saw accelerated losses last week. According to Bank of America Merrill Lynch, total dollar outflows last week were the largest ever and the fourth largest as a percentage of AUM. So, all in all, bonds displayed risk-off activity, which of course should be no surprise.
Of course, overbought technical conditions combined with frightening geopolitical turmoil have made equity investors hesitant. And then there was the $100 billion in M&A that suddenly collapsed last Tuesday when the Twenty-First Century Fox (FOX) acquisition of Time Warner (TWX) and the Sprint (S) bid for T-Mobile US (TMUS) both fell apart. Nevertheless, M&A and stock buybacks remain robust — and are expected to continue as such.
And Friday saw quite a resumption in bullish sentiment, with green across the board. In fact, all 13 of Sabrient’s Baker’s Dozen top stocks for 2014 finished the day positive. Interestingly, the five leaders in the portfolio on Friday were those stocks that have been the laggards so far this year, including Huntington Ingalls Industries (HII), NetApp Inc. (NTAP), Prudential Financial (PRU), Express Scripts (ESRX), and Marathon Petroleum (MPC). Top performers year-to-date are NXP Semiconductors (NXPI) and Southwest Airlines (LUV).
The CBOE Market Volatility Index (VIX), a.k.a. fear gauge, spiked a few times during the week above 17 but closed Friday at 15.77, which is back near the magic 15 level. If VIX can fall back below 15, equity bulls should be able to make a good upside run. Also, there was a lot of put buying last week, and those who took the other side of those trades at the strikes with highest open interest had to short stocks or futures to protect themselves (i.e., delta-hedge selling). So, if the market can hold up during this expiration week, short-covering might be a source of added fuel for the bulls.
Looking at the ten U.S. business sectors, Technology has surged to the year-to-date performance lead, up about +11%. Utilities has lost its big lead and now sits in a virtual tie for second place in YTD performance at around +10% with Energy and Healthcare. Notably, since May 1, Utilities has lost about -4% while Technology has gained about +7%. At the bottom are Industrial, Consumer Services/Discretionary, and Telecommunications. As a reminder, our forward-looking SectorCast rankings have consistently put Technology at the top, while Telecom and Consumer Services/Discretionary have dwelled at the bottom.
By the way, have you noticed the tremendous outperformance so far this year in the Sabrient Defensive Equity Index, which is tracked by the Guggenheim Defensive Equity ETF (DEF), compared with the SPDR S&P 500 Trust (SPY), Guggenheim S&P 500 Equal Weight ETF (RSP), and PowerShares S&P 500 Low Volatility Portfolio (SPLV)? Â DEF is up nearly +10% YTD while RSP and SPY are up less than +6% and SPLV is up less than +4%. I have long considered DEF as the original low-volatility large cap ETF since 2006, even though SPLV came along in 2011 to claim the mantle (as well as most of the assets).
SPY chart review:
The SPDR S&P 500 Trust (SPY) closed last Friday at 193.24, which is up slightly from the priorFriday, after a week of consolidation and testing of support on elevated volume at the 100-day simple moving average. So far it has held, and Friday was a very strong day across the board. Additional support levels are nearby, including resistance-turned-support lines at 190 and 187.5, the 200-day SMA around 190, and the lower line of the larger rising bullish channel approaching 188. Oscillators RSI, MACD, and Slow Stochastic have all turned back up from oversold territory and could rally further from here.
