As a rather uninspiring earnings season starts to wind down, bullish investors eager for a significant catalyst from company reports instead have been left a bit flat-footed and disheartened. With consumer sentiment and retail sales flagging in key overseas markets like Europe and China, global capital continues to flow into the safety of u.s. Treasuries, driving down bond yields despite a supposedly imminent fed funds rate hike. Furthermore, given narrow market breadth, high equity correlations, a tenuous technical picture (especially small caps), and a defensive turn in Sabrient's fundamentals-based quant rankings, there seems little reason for bulls to get pumped up about jumping back into equities at the moment. Nevertheless, the longer term direction is still up.
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:
With 80% of S&P 500 companies having reported, the conclusion is that both revenues and earnings are down from the same quarter last year. On the other hand, about 70% of those who have reported beat earnings expectations, and if you strip out the anomalous Energy sector, the other sectors in aggregate display reasonably good growth in both revenues and earnings. In particular, auto sales have been scorching hot. And of course, healthcare has been by far the best performing sector.
Economic reports show continued improvement. Unemployment claims have remained below 300,000 for 21 weeks (which is less than 0.2% of total jobs), and Friday's jobs report showed that the number of full-time jobs as a share of total employment rose to 81.7% (which is the highest level since November 2008). ISM services index came in at 60.3, which is up from 56.0 last month, and it is the highest reading in 10 years (and only the third time above 60 in 15 years). Moreover, the New Orders component reads 63.8, which is promising for the future. The trade deficit widened by 7.1% in June to $43.8 billion, as imports rose while exports fell, which could lead to downward revisions to GDP in the future.
ConvergEx recently noted that fed funds futures are signaling virtually no chance of a hike in September. And with the 10-year Treasury yield closing Friday at 2.17% and the 30-year at 2.83%, global investors continue to buy up Treasuries (therefore driving down rates) and clearly have no fear of any near-term jolt in interest rates that would kill the value of their bond holdings. On the other hand, many economists and commentators (notably including Bill Gross) are predicting a September hike — even suggesting that the Fed must act. My view is that the Fed cannot afford to raise rates right now given that weak commodities markets and a strong dollar have put us on the verge of deflation. Higher rates would further strengthen the dollar. But even if the Fed does make a token 0.25% increase in September or December, it is highly unlikely that a rapid sequence of increases will ensue. Indeed, we might not see another one through 2016.
