Stock Market Analysis
Perhaps it did not feel so, but the past week was one of small advances. The Dow rose almost one half of one percent, more stocks rose than fell. The S&P500 index also rose (weakly) and the small cap Russell 2000 Index advanced as well. In each index rise, credit goes to a few of the larger issues, not the bulk of the stocks. Overall, advancing issues outnumbered declines. Consumer Staples were strong while Energy stocks, Basic Material and Financial issues retreated. Commodities, including crude oil and many grains, were higher. As a counter to some favorable items, the dollar lost ground, declining almost 1.75% for this week.
The week’s close finds almost 61% of S&P 500 stocks above their 50-day moving average, while 70% are above their 200-day moving average, neutral kinds of figures with little significance for the future. Our 14 week stochastic is holding just above 80, bullish-neutral. Chartists follow a MACD technique using moving averages, now on a weak buy signal. (Note: my dissertation research found monthly moving averages to be somewhat less useful.) We have found extremes in sentiment to be more useful, and find Investors Intelligence “bulls – bears” sum of 31.7% to be worthy of note, having retreated from weekly high above 43%. The 43% would be bearish; declines from there to 31.7% reconfirm this negative.
As we review fundamental factors, we find the trend of reports to be worrisome. We have commented on the weakness in the recovery from the 2008 recession in areas such as full time employment, income growth, and GDP, when compared with the past. Now economists comment on subpar U.S. productivity growth. Last week we saw weak retail sales reports, rising business inventories, falling industrial production (for the 5th month in a row) and somewhat lower capacity utilization.
We have projected that sales overseas are apt to slacken for our largest companies as the stronger dollar raises prices for purchases by our trading partners. Producer prices fell slightly (0.2%) for the month as lower demand impacted the market.
The best news of the week may be the stabilization of our leading intermediate and short term indicators. As we scan the indicators this week, today’s neutral configuration of our intermediate term leading indicators do not suggest increased risk levels. At a reading of 59 our Risk Exposure Ratio is not extreme. We approach the months of the year when stocks underperform, however our longer term indicators, such as the presidential election cycle, remain in the favorable camp. This suggests we may see increased volatility ahead even as the prospect of a 2008 style decline with stocks falling over 40% is unlikely.
F James, Ph.D.
Bond Market Analysis
For the week the yield curve steepened as yields on shorter dated maturities fell while longer dated bonds (such as the 10 and 30-Year Treasuries) had their yields rise. At one point in the week the 10-Year Treasury had its highest yield since early December before a rally began pushing yields lower on Wednesday.
One of the biggest questions for many investors is; when will the Fed take action? Obviously it is impossible to know with certainty what action a group of men and women will take but there are clues.
First there is the Fed Chairwoman, Janet Yellen, to consider. Before her time as head of the Fed she was an academian. Much of her writings dealt with the importance of jobs and a strong job market. Her actions are likely to err on the side of caution and keep rates low.
Next is the strength of the overall job market. Some analysts believe a rate hike in June or September is more likely after the latest Unemployment Rate and Payroll Gains reports. Perhaps. However, the Federal Reserve has created a Labor Market Indicator made up of not two, but 19 separate indicators. These include items like the participation rate, hours worked, and reports on jobs hard to get. This Labor Market Index has just given its second consecutive month of negative levels. It seems the job market is not as healthy as some would believe.
There is also concern about the economy overall. Many forecasters believed the 2nd quarter would see a big economic revival after a poor 1st quarter. The narrative being, “Bad weather is over, good times ahead”. Economists surveyed by Bloomberg were recently even predicting growth over 3% for the quarter. However, they are just beginning to backtrack and have lowered their expectations to 2.8%. This is still probably too optimistic. The Atlanta Fed produces a quantitative estimate for GDP called GDPNow. This number suggests we may only see growth of 0.7% for the 2nd quarter.
Internationally the United States remains attractive for bond investors. Our yield on our 10-Year bond is a full one-percent higher than those found in France, Germany, Sweden, Netherlands, Switzerland, Finland, Austria, Czech Republic, Denmark and Japan.
Indeed, looking at our leading intermediate bond indicators we note a slightly favorable turn over the last few weeks. Certainly we do not see them as attractive as last year when our research called for it to be, “The Year of the Bond”. Still, we believe opportunities will exist this year. Presently we would maintain holdings in high quality bonds.
David W. James, CFA
