Archive for category: Investing

Stock Market Update

The volatility continued last week as stocks enjoyed an oil-inspired short squeeze and recouped all of the previous week’s losses. The S&P 500 finished the week up 3% and now is essentially flat (-0.17%) on the year.

Last week started with a thud, as stocks initially traded lower on Greece and oil before putting in a sharp reversal Monday to close higher by over 1% as oil prices rebounded.

Tuesday, the gains were extended, this time on encouraging M&A chatter between ODP and SPLS, but continued strength in energy also was a big contributor to the rally.

Stocks moderated Wednesday on ECB/Greece concerns but the weakness was short lived, as the S&P followed Europe’s lead higher on Thursday and extended morning gains into the afternoon on further oil strength.

Initially the rally continued Friday, but the jobs number was a bit “too hot” and a surge higher in interest rates and some profit taking resulted in stocks experiencing a modest sell-off Friday afternoon.

Trading Color

We continue to operate on the general premise that the S&P 500 remains stuck between 2,000-2,050 (give or take 20 points on each side). And, while last week’s rally was broad and impressive from a percentage standpoint, internally it wasn’t all that strong and reeked of short covering, further confirming our trading range premise.

The Dow was the best-performing major index, up 3.85% thanks in part to the DIS earnings blowout, but also because the Industrials had gotten very beat up during earnings season due mainly to FX headwinds (so it was a lot of short covering). The Nasdaq lagged somewhat substantially, up just 2.35% while the Russell 2000 slightly outperformed the S&P 500.

Sector wise, the most interesting trend that emerged (and that we think can continue to have legs) is the “higher interest rate” rotation. Despite the focus on energy, banks were actually the best-performing sector last week, as KRE (regional bank ETF) surged more than 8%. Interestingly, that rally happened all week—it wasn’t just Friday in reaction to the jobs report.

Conversely, high yielding/larger dividend sectors got absolutely hammered on Friday. XLU (utility ETF) dropped 4% on Friday, its biggest one-day move in a very long time.

Turning to energy, XLE did have a good week, rallying 5% along with oil, and importantly made a new multi-week high, improving the chart.

XLE now is up against a key downtrend, and if this is just a big short-covering rally, we should see XLE struggle to get above the $80 level. Two or three closes above that resistance would be bullish.

Bottom line from a sector and internals standpoint, the biggest takeaway was the massive bank outperformance, and that’s something that can continue as a “higher rate” sector trade is very, very under-owned right now. More broadly, the internals largely confirm that last week’s rally was mostly short covering, and shorter-term positioning by traders, and does not imply the broad market is about to breakout.

Greece Update

The rhetoric got more combative over the weekend and sentiment is very negative regarding this situation—but beyond the posturing the bond market is telling us a deal to keep Greece in the EU still gets done, eventually. Over the weekend PM Tsipras said he wouldn’t seek an extension of the current bailout, which looks ominous. But, that’s nothing new, as this entire drama is about negotiating a new bailout. The important thing to focus on here is that Greece gets a bridge agreement from the EU for a few months so all sides can negotiate a new bailout. Wednesday is shaping up to be a very big day in this drama (it’s a EU Finance Minster meeting and some progress on that bridge agreement will need to be made by its conclusion).

Bottom Line

It was an impressive move from the Monday lows (1,980) to the Friday highs (2,072) – making it nearly a 100-point, four-day rally. And, as much as I don’t want to be dismissive of the rally, it came without any material positive resolution of the fundamental headwinds, and as such I continue to maintain we’re broadly in this 2,000-2,050 range in the S&P 500. In fact, you could make the case that last week saw another potential macro headwind introduced to the market, as a Fed rate hike in June (and the troughing of inflation in the US) is now in play.

The major catalyst for the rally was a rebound in oil and the stalling of the US Dollar rally, which ignited a major short-covering rally. But despite the moves, several general headwinds on markets remain: Global growth is still suspect, it’s not clear oil has materially bottomed, the US market is now more expensive on a P/E basis following earnings season, and a huge gap remains between market expectations for interest rates and Fed expectations for interest rates.

All of these issues likely will be resolved positively, but that may take several more weeks, and until that happens it’s tough for us to see material upside in markets.

Broadly, we are holding allocations (we are not adding to domestic sectors up here) and our two favorite strategies at the moment remain buying Europe, and domestic consumer-related cyclicals on dips in the S&P 500 towards 2,000.

HEDJ remains our “best idea” over the medium term despite Europe underperforming last week for the first time all year. Fundamentals remain favorable, and the Greece situation, while certainty a risk, still will likely turn out “ok.” If we get to the end of February and no extension of the current bailout program is reached, then that changes things negatively—and that’s the scenario we’re watching.

Domestically, we continue to be bullish on consumer oriented cyclical sectors on any broad market dip towards 2,000: RTH and KRE remain our two favorite sector ETFs, and we are also now getting bullish on small caps, which we think can outperform large caps this year, reversing the 2014 trend (IWM is the Russell 2000 ETF).

Energy remains tempting, but since I do not think we have seen the bottom in oil, I’m staying away from XLE and other energy companies. If XLE breaks that $80 level the technicals get more positive, but for now I don’t think the risk is worth the reward.

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Discussing interest rates and whether equities are still attractive, with Margie Patel, Wells Fargo Funds Management; Anthony Chan, Chase; Sam Stoval, S&P Capital IQ; Tom Essaye from Seven’s Report.

By far the biggest event in the stock market today, not only for the Dow Jones Industrial Average and the S&P 500, but also for the currency, bond and international financial markets today, was the European Central Bank’s (ECB) move to issue even more “QE” than even the most optimistic bulls had anticipated.

In fact, “Super” Mario Draghi lived up to his moniker, juicing financial markets today with a much-bigger-than-expected bond buying program that exceeded estimates both in terms of scope, and size. The result was a near 260-point spike in the Dow Jones Industrial Average, which lead other financial markets today markedly higher in sympathy.

Let’s take a look at the details of the ECB QE, and you’ll see why they caused such a kerfuffle in the markets today.

Size: 60 billion euros per month for 18 months vs. (E) 50 billion for 12 months.

Yes, some are saying the 60 billion per month is a touch misleading because it includes previously announced ABS and CDO purchases, but I think this is missing the bigger point. You see, the ECB QE is really all about the aggregate size of the balance sheet.

The new ECB balance sheet will be over 1.2 trillion euro by September 2015, with room for more. That is far larger than the previously stated 1 trillion euro target—and that, my friends, was the eminent source of the bullishness in the stock market today.

Risk Sharing: The sovereign bond purchases will be “Pari-Passu.”

The ECB said sovereign bond purchases would be pari-passu (meaning all bond purchasers can will be regarded equally, and thus repaid at the same time), which is important because it won’t result in an offset of private market debt purchases. Despite not including total risk sharing across the ECB, and as such putting default risk on the balance sheet of the national central banks, the bottom line is that the chance of default (which is really all that matters here) on much of the QE debt remains very low, and will not be an inhibitor to the success of the program.

Unanimity of the Decision: All Parties Thus Concur

Whether the Germans were on board with the ECB QE was a topic of concern for the markets today. While there was no actual vote (so we can’t see who was for it or against it), Draghi said in the press conference that there was unanimity in using QE as a legal monetary policy tool. This strongly implies the Germans, while likely reluctant, will not try to derail the program.

I believe the stock market today reflects the bullish response to the ECB QE, not just here at home but particularly with respect to European equities. In fact, if you are looking to buy the ECB QE then I think the best way to do so is with an exchange-traded fund (ETF) such as the Wisdom Tree Europe Hedged Equity ETF (HEDJ).

This fund already is significantly outperforming the S&P 500 year to date (7% vs. 1%), and I suspect this can continue over the coming weeks and months.

Interestingly, I was surprised yesterday while watching the analysis/reaction to the ECB QE announcement, as some of it seemed to focus on the economic implications of the details of QE.
We don’t actually know if QE helps an economy, even after six years of it here in the United States. However, we are interested in stock market returns, and we do know pretty well that QE makes nominal stock prices go up (see UK stocks, Japan stocks and US stocks).

My initial bullish thesis on Europe was based on the proposition of an expanded balance sheet, and seeing as the ECB is committed to an even larger and open-ended balance sheet expansion than most had previously anticipated, I view this as even more European equities bullish.

From an investment standpoint, I continue to like HEDJ as the single best way to play “Europe” broadly, as it also protects you from a decline in the currency. And despite the falling currency, I still like country-specific and sector-specific ETFs such as the iShares MSCI Italy Capped (EWI), Global X FTSE Portugal 20 ETF (PGAL), and the iShares MSCI Europe Financials (EUFN).

While these respective ETFs are not protected from the drop in the euro (and it will weigh on returns for US investors) I believe the potential upside in these ETFs is more than enough to warrant taking on the currency risk. To use a crude analogy, HEDJ is like the S&P 500, while the remaining ETFs are like cyclicals sectors—and thus they will be more volatile than HEDJ in both a rising and falling tide.

Bottom line: For anyone other than those with a very short-term outlook, I think you can begin to leg in to HEDJ or the other positions. And, if you already own them, I think adding to them gradually on a schedule over the next week or two will prove prescient.

Although nearly every week is replete with news, economic events and all manner of market-moving headlines, not all weeks are created equal.

This week is, in fact, the first really important macro-economic week of 2015, and while there aren’t a huge number of economic events, what we do have on tap is extremely important.

Obviously, the clear highlight this week is the European Central Bank (ECB) meeting on Thursday. We’ll be previewing the particulars of the meeting in the coming days, but given the Swiss National Bank (SNB) decision last week to de-peg the franc from the euro, it seems that expectations are high for something big from the ECB QE plan.

At this point, 500 billion euros remains a key level to watch. I suspect that anything below this level will be considering underwhelming.

Now, in addition to the ECB we also get the global January flash PMIs Wednesday night/Thursday morning. Given the concerns about global growth and global deflation, these metrics are very important, as the market needs a confidence boost about the pace of growth globally.

Specifically, China and Europe remain in focus, especially following the downbeat Chinese growth data Monday night and the ECB decision looming Thursday morning. And, for the first time in a few months, even the US data will be watched closely. On an absolute level it should be fine, but right now the key is just how much momentum the US manufacturing sector is losing.

If we see a sharp deceleration in US manufacturing data, it may weigh further on sentiment. Now, staying in the US, we also get the latest round of housing data via housing starts on Wednesday, and existing home sales on Friday. Keep in mind that housing has quietly lost a bit of positive momentum over the past two months, and some stabilization in that data will help provide a boost to market confidence.

For 2015, the global economy is estimated to expand by 3%, which is down from a projected 3.4% growth rate in June. In 2016, the World Bank thinks growth will come in at 3.3%, which is down from the prior estimate for 3.5% growth.

Bottom line: This week is key, because it is an opportunity for the ECB and economic data to help partially vanquish the growing concerns about the pace of global growth and disinflation. If the PMIs are decent (meaning China and Europe stay above 50), and the ECB does something powerful (i.e. QE greater than 500 billion), the outlook for the global economy could be a lot better as we head into Greek elections Sunday.