By J Clinton Hill, Capital Markets Strategist @ Hillbent.com
Market Commentary: July-27-2016
Maintaining support near all-time high levels in a post-Brexit world is the last thing most investors would have expected from the S&P 500 (SPY), but that is what is. However, after 10 days of narrow range consolidation, the SPY is finally showing some cracks in its foundation. Deceleration in positive market momentum is becoming more pronounced and being confirmed by a notable contraction in the percentage of stocks trading above their 20 and 50 day moving averages. In addition to this, patterns of distribution selling in some major sectors are emerging and spilling over to the broader benchmark index as well. That’s the technical side of it.
Fundamentally, market sentiment is aligned with earnings and central bank policies. Apple reported better than expected earnings and positive Q4 guidance after yesterday’s market close, which had a bullish impact on stocks, especially the Nasdaq-100 index.
Of course, much awaited has been news from conclusion of the Federal Reserve’s 2-day meeting. While it decided keep interest rates unchanged, the removal of the inclusion of “near term risks” from its statement speaks volumes about its perception of an moderately expanding economy based on job gains, increased labor utilization rates and strong growth in household spending.
Not to be outdone, Japan’s Prime Minister Abe upstaged the Fed with the announcement of a 28 trillion yen ($285 USD) fiscal stimulus plan that will most likely pressure the BOJ to reciprocate with some sort of monetary stimulus of its own this Thursday, e.g. another interest rate cut.
ETF Performance Summary: July-27-2016
Equities: The Nasdaq-100 (QQQ) and Russell-2000 (IWM) continue to make new highs, the former on expanding volume and the latter on shrinking volume. For the most part, US stocks are treading water as both the SPY and Dow-30 Industrials (DIA) barely changed in price. Internationally, performance was mixed with Europe (VGK) being one of the day’s top performers while China (FXI) lagged.
Bonds: Could the flight to safety trade be returning to the market? It certainly appears to be the case given the relatively strong performance in bonds. The 20+ Year Treasury (TLT) was one of today’s leader in our ETF bond universe.
Currencies: Then again, switching to the major currencies, the weak performance of the Yen (FXY) and US Dollar (UUP) vs a stronger Euro (FXE) indicates a lack of competing economic data vs. the positive consumer and business sentiment reports coming out of Europe. The greenback was vulnerable to profit taking as the Fed punted on another rate increase while early front-running sellers may have attempted to get ahead of a BOJ rate cut.
Commodities: Now comes the good part. As I have been forewarning lately, Gold (GLD) is diverging from the DB Commodities Index (DBC) and the US Oil Fund (USO). Being today’s top performer was not enough, but GLD did so on 43% higher than average volume, thus confirming strong demand for this precious metals asset.
Real Estate: The DJ Real Estate Index (IYR) and iShares Residential (REZ) have transitioned to correction mode and may see further downside. Be careful as both are in violation of their short-term uptrends. For now, Home Construction (ITB) is consolidating and it is premature to make a bearish call on this one, so I’ll assign a neutral rating until further notice.
And that’s a wrap from Hillbent until we cross paths again on the Market Direction…