Despite low trading volume, a strong dollar, mixed economic and earnings reports, paralyzing weather conditions throughout much of the U.S., and ominous global news events, stocks continue to march ever higher. The world remains on edge about potential Black Swan events from the likes of Russia, Greece, or ISIS (or lone wolf extremists). Moreover, the economic recovery of the U.S. may be feeling the pull of the proverbial ball-and-chain from the rest of the world’s economies. Nevertheless, awash in investable cash, global investors see few choices better than U.S. equities.
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:
Happy days are here again, or so the U.S. stock market would have us believe, as all major indices are hitting or challenging new highs. The S&P 500 long ago eclipsed the 2000 mark and is now holding above 2100. The Dow Jones Industrials is solidly above 18,000. Even small caps and mid caps have joined the new-high party. The NASDAQ, which hasn’t challenged its Internet-bubble high of 5,048 in 15 years, managed to close Monday above 5,000 and seems determined to make its own new high — perhaps this week. As a reminder, next Monday, the bull market will reach its 6-year anniversary.
Stock buybacks and M&A continue at a robust pace, even though these aren’t the most popular uses of cash reserves among activist investors, who tend to prefer capital expenditures, hiring, and increased dividends. Nevertheless, the market has applauded some recent M&A that involved some of our top stock picks. Last week, Valeant Pharmaceuticals (VRX), which is in Sabrient’s annual Baker’s Dozen top picks list this year, spiked +14% after announcing it would acquire former Sabrient favorite Salix Pharmaceuticals (SLXP), which 16 months ago bought another of our former favorites Santarus. Then today, NXP Semiconductor (NXPI), which has been in three consecutive Baker’s Dozen top picks lists, announced it will acquire Freescale Semiconductor (FSL), which is also highly ranked in our system. NXPI was up over +17% for the day.
Earnings season is winding down, and FactSet reported Q4 earnings growth to be +3.7% overall, which is pretty good, although revenue growth has been much more muted. Q4 GDP was revised downward to +2.2% and the ISM manufacturing index fell to 52.9 (due in part to the West Coast port slowdown), but both are still pretty good. So, economic growth continues to slog ahead, and the Fed is expected to continue on its path toward normalizing monetary policy. Although there might be some short-term hits to stocks when rates start bumping up, the consensus is that it would take a fed funds rate of over 3% before there would be any meaningfully negative impact on the economy. With inflation nowhere in sight, it is unlikely we will see fed funds rate that high anytime soon.
